For months, Diamondback Energy chief executive Travis Stice insisted to investors that the US independent did not need to acquire other companies, despite the turmoil in the oil and gas industry. But as it turns out, Stice was planning to do just that.
With just ten days left in the year, Diamondback announced it will buy not one, but two competitors in the Permian basin for more than $3bn in stock, cash and debt.
Diamondback will purchase QEP Resources for $2.2bn, including $600mn in stock and assumption of QEP's $1.6bn in debt. The deal will close by early second quarter next year.
The company will also acquire the assets of Guidon Operating for 10.63mn shares of Diamond stock and $375mn in cash. The value of Diamondback's shares will depend on the stock price the day the transaction closes in February 2021, but based on today's closing price today of $44.86, those shares are worth $477mn.
Diamondback's moves cap a year that has witnessed a surge of consolidation, especially in the Permian, as both majors and independents have struggled to adjust to significantly lower oil and gas prices because of the Covid-19 pandemic.
Even as producers have laid off workers, halted new drilling and slashed capital spending, some companies have opted to opportunistically acquire scale by bolstering their positions in the high returning fields in the Permian. Deals with major Permian components include Chevron (Noble Energy), ConocoPhillips (Concho Resources), Pioneer Natural Resources (Parsley Energy), and Devon Energy (WPX). All four deals place those combined companies among the top eight producers in the Permian, each with nearly 250,000 b/d or more of output based on first quarter 2020 numbers. Rounding out that top eight are Occidental Petroleum and ExxonMobil — firms that are struggling with bigger issues than consolidating a Permian position right now — and EOG and Diamondback.
Previous takeover attempts
For most of this year, Stice had seemed to resist the pressure to pursue acquisitions. But in a conference call with analysts today he said the company has coveted QEP and Guidon's assets in the Midland basin for several years. In 2016 Diamondback unsuccessfully tried to buy them.
Stice said QEP and Guidon were the company's "two top targets" at the beginning of the year. But the pandemic struck and WTI prices plummeted in the spring, scuttling hope for a deal.
But the market started to rebound and prices eventually stabilized around $40/bl and recently hit $49/bl amid the Food and Drug Administration's approval of two vaccines against Covid-19. The price recovery allowed Diamondback to pursue and ultimately get QEP and Guidon, Stice said.
"These tough times can present opportunities for companies that are prepared," Stice said.
QEP and Guidon's assets address a long-time criticism of Diamondback, Stice said: despite the company's reputation as a capable operator, it lacked a strong portfolio of Tier-1 assets, wells that can generate return rates of at least 30pc.
With QEP, Diamondback gains 49,000 acres in the Midland basin that produce about 48,000 b/d oil equivalent (boe/d). Guidon gives Diamondback 32,500 acres that produce 18,000 boe/d. The two acquisitions extends the life of Diamondback's Tier-1 portfolio for "more than a decade," Stice said.
Diamondback will soon start to shift some capital investments from its current projects towards its new assets. The company expects capex spending this year to hit $1.8bn-$1.9bn. One project that will receive significant capital investments is QEP's assets in the Robertson Ranch in the North Midland, chief financial officer Kaes Van't Hof said.
In 2017 QEP spent $600mn to acquire Robertson Ranch and other assets from the Cox family, beating out Diamondback for reserves of approximately 76mn boe. At the time, the deal price translated to an outstandingly high $51,000 an acre.
But three years later, Van't Hof said QEP had yet to spend on developing Robertson Ranch, estimating it is less than 10pc developed. "That's going to be an exciting opportunity," Van't Hof said.
Selling some assets, expanding hedges
Diamondback will be looking to sell QEP's assets in the Williston basin and use the cash to pay down debt or boost its cash flow. The company will also consider selling its assets in the Bakken and South Midland basin.
Since Diamondback is absorbing QEP's hefty $1.6bn in debt — as of the third quarter, QEP held less than $10mn in cash — Van't Hof said the company will retain QEP's aggressive hedging strategy into 2021 in order to lock in the necessary cash flow to pay off the loans.
"Hedging needs to become a better part of our strategy regardless of our debt levels," Van't Hof said.
One thing that won't change is Stice's belief that the industry is oversupplied and that companies need to resist increasing production in 2021.
"There should be no growth in our sector, full stop," Stice said.
Even with the two acquisitions, Stice said Diamondback will not increase capex spending or production. The company can keep 2021 oil output flat with fourth-quarter 2020 levels for 25-35pc less than its 2020 spending levels.
The company averaged 170,000 b/d of crude output in the third quarter and expects it to rise slightly in the fourth quarter, to between 170,000-175,000 b/d.
