Diamondback buys Endeavor for $26bn: Update 2

Adds details from call.

Diamondback Energy agreed to buy Endeavor Energy Resources for $26bn to create the largest pure-play Permian producer as the recent wave of consolidation in the shale patch heats up.

The cash-and-stock deal, which includes debt, brings together 838,000 net acres under lease and 816,000 b/d of oil equivalent (boe/d) of net output.

The transaction follows on the heels of ExxonMobil's $59.9bn takeover of Pioneer Natural Resources late last year, which was followed by Chevron's $53bn acquisition of Hess. As the shale sector matures, companies are seeking to bulk up through mergers and acquisitions to extend their inventory of future drilling locations.

"We've evaluated every deal in the Permian over the past decade and there has not been another opportunity that has come close to this scale and quality," said Diamondback's chief executive officer Travis Stice. Both companies are based across the street from one another in Midland, Texas, which should help with the transition, he said.

Endeavor, one of the largest private operators in the Permian, has been the subject of repeated takeover speculation in recent years. It is owned by billionaire founder Autry Stephens, who drilled his first in 1979. The company has almost 350,000 net acres in the Midland subsection of the Permian.

Both companies will run about 26 rigs between them this year. That will drop into the 20-22 range over the long term as drilling efficiencies pay off.

Endeavor was able to snap up some of the most valuable Permian acreage well in advance of the shale boom, boosting its appeal to would-be buyers, according to Andrew Dittmar, senior vice president at SVP Enverus Intelligence Research. The "significant overlap" with Diamondback's acreage also offers opportunities for the sort of cost savings investors are clamoring for, he said.

The deal is expected to result in annual savings of $550mn, representing more than $3bn in net value over the next decade, the companies said.

While public independents have exercised capital discipline and reined in growth in the years following the pandemic, private operators have shown little restraint. Overall US production reached a record last year, led by the Permian basin as companies drilled longer laterals and became more efficient. Growth is expected to stall this year and output is unlikely to scale new highs until early 2025, according to the US Energy Information Administration.

Shale oil producers have pressed the need for industry consolidation for years, given the highly-fragmented nature of ownership in the Permian. Recent deals have sent valuations spiraling, and sparked a frantic scramble to snap up what remains of the region's prized acreage.

An increase in private exits has reduced the number of such firms up for grabs. "While there are a handful of potential public company tie-ups, the next wave of Permian dealmaking will likely need to be driven by non-core asset sales from the big buyers," said Dittmar.

The latest deal comprises around 117.3mn shares of Diamondback common stock, and $8bn in cash.

The structure of the transaction will see Diamondback's existing shareholders owning about 60.5pc of the combined company and Endeavor's equity holders the rest. Diamondback's board has unanimously approved the deal, which is expected to close in the fourth quarter.

By Stephen Cunningham