Morningstar Reveals Surprise at Diamondback-Endeavor Deal

In an industry pulse report sent to Rigzone recently, analysts at Morningstar revealed that they were surprised by Diamondback’s deal to acquire Endeavor.

“Diamondback was the eventual winner in what we believe to be a highly competitive bidding process,” the analysts noted in the report, adding that they had expected Endeavor to be acquired “as it has been up for sale a few times in the past few years, and the time was right for a sale due to the founder’s poor health”.

“The deal removes one of the last large private sources of sizable Permian acreage and consolidates quality Permian inventory within relatively few hands,” the analysts stated in the report, noting that Diamondback and ExxonMobil now control about 50 percent of the Midland side of the Permian Basin.

“We think Diamondback’s culture of low costs and ability to extract synergies from deals, as it has done for years via prior deals (Firebird, Lario Permian, and so on), will essentially ensure this deal will be another winner,” the analysts said in the report.

“Diamondback estimates synergies at $550 million, or $3 billion on a net present value basis. The other Permian-focused deals we’ve seen over the past few months, including ExxonMobil/Pioneer, Occidental/CrownRock, and APA/Callon, will seek to execute a similar playbook,” they added.

In the report, the Morningstar analysts warned that the biggest takeaway from the deal activity “is that the U.S. production growth curve will flatten further”.

“Public firms are largely seeking to cut costs, reduce drilling activity, and maximize returning cash to shareholders,” the analysts said in the report.

“This is in sharp contrast to private entities, which were far more focused on growth over the past few years since they did not have to deal with public shareholders,” they added.

“For context, in 2023, U.S. oil production increased by about 850,000 barrels per day. 2024 estimates are already falling rapidly, with 2024 growth between 150,000-400,000 barrels per day,” the analysts went on to state.

On February 12, Diamondback and Endeavor announced in a joint statement that they had entered into a definitive merger agreement under which Diamondback and Endeavor will merge in a transaction valued at approximately $26 billion, inclusive of Endeavor’s net debt.

The transaction consideration will consist of approximately 117.3 million shares of Diamondback common stock and $8 billion of cash, subject to customary adjustments, the companies noted, adding that the cash portion of the consideration is expected to be funded through a combination of cash on hand, borrowings under the Diamondback’s credit facility and/or proceeds from term loans and senior notes offerings.

As result of the transaction, Diamondback’s existing stockholders are expected to own approximately 60.5 percent of the combined company and Endeavor’s equity holders are expected to own approximately 39.5 percent of the combined company, the statement revealed.

The transaction was unanimously approved by the board of directors of Diamondback and has all necessary Endeavor approvals, according to the statement, which outlined that the combined company had a pro forma scale of approximately 838,000 net acres and 816,000 barrels of oil equivalent of net production.

In a market update sent to Rigzone following the announcement of the deal, Rystad Energy projected that the combined Diamondback-Endeavor company will produce 819,500 barrels of oil equivalent per day in the Permian this year.

In an earlier statement sent to Rigzone, Andrew Dittmar, the Senior Vice President of Enverus Intelligence Research, said the Diamondback-Endeavor combination creates a Permian pure play with an enterprise value of about $60 billion and 816,000 barrels of oil equivalent per day of pro-forma production.

In a release posted on Wood Mackenzie’s website last month, which focused on the Diamondback-Endeavor deal, the company’s research director for corporate research, Alex Beeker, said “this deal creates the largest Permian pure play company, and it will trail just ExxonMobil and Chevron in terms of total Permian production”.

“According to Wood Mackenzie analysis, with 816,000 barrels of equivalent per day of combined production, the new company is effectively the size of Pioneer,” the Wood Mackenzie release stated.

“Six companies will now produce more than 700,000 barrels of oil equivalent per day in the Permian. The top 10 companies in the Permian will now produce more than 6.4 million barrels of oil equivalent per day,” it added.

To contact the author, email andreas.exarheas@rigzone.com