Diamondback Energy Spending $10.5 Billion in Permian Acreage Expansion

Diamondback is slated to become the Permian’s latest pure-play giant with its pending purchases of Energen and Ajax Resources.

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Diamondback Energy Inc. is amassing billions of dollars’ worth of Permian basin acreage in a pair of deals that rivals recent acquisitions by BP and Concho Resources.

In the biggest, reported 14 August, Diamondback agreed to acquire Energen Corp. in an all-stock deal valued at $9.2 billion, including Energen’s net debt of $830 million. A week earlier, Diamondback said it agreed to buy Ajax Resources for $1.25 billion.

The deals will give Diamondback 390,000 net acres across the Midland and Delaware Basins, up 85% from 211,000 net acres as of 30 June. This includes 266,000 net “tier one” acres and 7,000 estimated total net horizontal locations, the company said in a statement.

Combined for the second quarter, production of 222,000 BOE/D, of which 67% is oil, represents an increase of 79% and ranks the company third among Permian pure-play operators, it said.

Diamondback said the Energen deal will result in financial synergies including drilling, completion, and equipment well cost savings of up to $200/lateral ft across 2,000 net operated locations in the Midland Basin; and of up to $50/lateral ft across 1,500 net operated locations in the Delaware Basin.

Upon completion of the Energen buy, Diamondback will own 390,000 net acres across the Midland and Delaware Basins. Source: Diamondback Energy.


However, synergies from long-lateral locations “will be limited” as the companies’ acreage is adjacent only in a few areas, noted Artem Abramov, vice president of shale research at consultancy Rystad Energy. “Nevertheless, relative proximity of individual acreage blocks in the northern Midland Basin opens the door to significant logistical efficiencies,” he said.

While logistical synergies in the Delaware are few, “the significance of extending Diamondback’s footprint in the northern part of the Delaware basin cannot be underestimated,” Abramov said. A core portion of Energen’s Delaware acreage sits at the intersection of Loving, Ward, and Reeves counties, while Diamondback’s acreage in the basin is primarily in Reeves and Pecos counties to the south.

As for well productivity from Energen’s acreage, there is room for growth.  

“Looking at realized oil decline curves for 2016-2018 completions in the northern Midland, we observe that Diamondback’s wells typically deliver 25% higher cumulative oil production over the first year as compared to Energen’s wells,” said Abramov. “This outperformance in normalized productivity is mirrored by lower proppant intensity, significantly lower drilling and completion costs, and consequently lower breakeven prices on Diamondback’s portfolio.”

Energen shareholders will receive 0.6442 shares of Diamondback common stock for each share of Energen common stock, representing an implied value to each Energen shareholder of $84.95/share based on the closing price of Diamondback common stock on 13 August. Once the deal closes, which is expected by the end of the fourth quarter, Diamondback and Energen shareholders will respectively own 62% and 38% of the combined company.

Diamondback’s executive team will stay in place and the company will remain headquartered in Midland, Texas.

Recent large-scale mergers and acquisitions have resulted from a more crowded Permian where the best acreage is believed to be already owned. BP’s pending $10.5-billion purchase of the vast majority of BHP Billiton’s US shale business, announced in January, will mark the major’s re-entry into the basin. Also that month, Concho reported the closing of its $9.5-billion acquisition of fellow Permian pure-play operator RSP Permian.