The game of musical chairs continue in America’s oilpatch today as Permian Basin pure play Diamondback Energy FANG added two deals which boosted its holdings there by 80,000 acres and will expand its oil and gas output to about 340,000 barrels per day.
First, Diamondback will acquire QEP Resources for 12.27 million shares — worth about $2 billion at today’s $43 per share — and will also assume $1.6 billion in debt. Diamondback will also swallow Quidon Energy for $850 million (10.63 million FANG shares and $375 million cash).
Investors weren’t enthused. Amid general market malaise at the advancing spread of mutated Covid-19 in the U.K., Diamondback shares were off 5.6% of $43.28 at midday, while QEP was down 7% to $2.15.
Investors could understandably be surprised at the acquisitions. In an earnings announcement early November, Diamondback CEO Travis Stice said the company “investment framework and capital allocation philosophy at current oil prices remain very simple and have not changed: protect our base dividend, spend maintenance capital to hold oil production flat, and use excess Free Cash Flow to pay down debt.”
That seemed like a good plan, as Diamondback’s assets have proven good enough to enable the company to generate $150 million in third quarter free cash flow, despite stubbornly low oil prices around $40 per barrel. The company’s production before the deals was 287,000 barrels per day (oil or gas equivalents).
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But now all of a sudden the company has levered up, diluted existing shareholders and burned its cash to grow production by some 70,000 barrels per day. The deals help Diamondback consolidate in the northern Midland basin portion of the much broader Permian basin region of west Texas and southeast New Mexico, ground zero of America’s shale fracking oil boom.
Both QEP and Guidon had been on sale for some time. QEP in early 2019 had an offer from hedge fund giant Elliott Management that would have paid $8.75 per share, but CEO Tim Cutt (ex Exxon and BHP Billiton) held out for more and ended up with the consolation prize of just $2.29 per share. QEP scrapped a late 2018 deal to sell its Bakken shale fields for $1.7 billion.
Guidon was formed in 2016 with $500 million from Blackstone BX and leadership by Jay Still, formerly of Pioneer Natural Resources PXD and ex-President of Laredo Petroleum LPI . They’d been looking for buyers since 2018, when Concho Resources was rumored to be interested.
Stice, 59, has led Diamondback for nearly a decade, and was previously with Laredo Petroleum. The deal gives him and Diamondback added heft in the Midland basin, and provides plenty of infrastructure assets to sell to its publicly traded master limited partnerships Viper Energy Partners LP and Rattler Midstream. With oil and gas production upwards of 340,000 barrels per day and 276,000 net surface acres in the Permian, Diamondback is now about half the size of Pioneer Natural Resources, which last month announced it would buy Parsley Energy, founded by the son of CEO Scott Sheffield, for $7.6 billion.