Enverus – Industry Insight Comment from Andrew Dittmar
In a one-two punch, Permian pure-play Diamondback Energy has added over 80,000 net acres in the core Midland Basin for ~$3 billion. Diamondback is acquiring publicly traded QEP Resources for $2.15 billion while simultaneously buying Blackstone-sponsored Guidon Energy for $862 million. Enverus commentary on these deals is below:
“The acquisition of QEP by Diamondback fits firmly within the mold established for 2020 public E&P consolidation. The deal is structured with no premium and all-stock consideration. It focuses on immediately boosting cash flow to fund shareholder capital returns and debt reduction. Diamondback also expects further support for cash flow through anticipated synergies of $60-80 million per year.”
“The focus of the QEP acquisition is their core acreage in the Midland Basin, supported by a significant midstream asset base. The midstream portion likely creates additional dropdown opportunities for Diamondback to its midstream affiliate Rattler. Diamondback is considering QEP’s Bakken position non-core, with a potential divestment on the horizon, pending market conditions allowing for a reasonable valuation.”
“The second part of Diamondback’s concurrent maneuvers is buying Blackstone-sponsored Guidon Energy for $862 million. Similar to acquisitions of private equity-backed companies in prior years, the buyout is a mix of cash and stock with the value now tilted a bit more towards stock. In addition, asset valuations have been reworked with a higher percentage of the total value targeting PDP and less being paid for undeveloped land in a lower rig rate environment.”
“Combined, the two acquisitions significantly enhance Diamondback’s core Midland Basin position and are expected to be immediately competitive for capital in its portfolio. Both positions are contiguous with existing Diamondback leasehold across its core operating fairway in the Northern Midland Basin. Commentary from CEO Travis Stice seems to indicate the company will be prioritizing capital allocations to its Midland Basin asset base, relative to its acreage in the Delaware Basin.”
“During recent years, Concho, Pioneer, and Diamondback have often been grouped together as the most significant public pure-plays in the Permian in terms of scale, fiscal health, and operational achievements. Now, all have been major participants in 2020’s hyperactive upstream corporate M&A market with one — Concho — choosing to exit while both Pioneer and Diamondback have played roles as consolidators.”
“For QEP, announcement of the acquisition ends a long run where they were often discussed as a potential target, including rumored buyouts by private investors. While bringing significant economic assets and supporting midstream infrastructure to the table, the company found itself in a tough portion of the market where it is hard to compete given a lack of scale. Shareholders, like the other targets of 2020, have to swallow a no-premium buyout, but they should ultimately benefit from ownership by a larger, top-tier operator like Diamondback.”
“Similarly, the remaining private equity-backed E&Ps in the Permian are on the table as potential targets. Many of these companies were built with plans for an eventually exit via sale to a public E&P, plans that have been challenged by the current market. In order to get a deal across the finish line, would-be sellers may have to temper expectations on the ratio of cash received versus equity, and the overall valuation on their assets. In these situations, finding a buyer like Diamondback whose equity the sponsor is comfortable holding is likely critical.”
