Deal Frenzy Swells With Diamondback's $8.4 Billion Shale Buy

(Bloomberg) -- Diamondback Energy Inc.’s agreement to buy Energen Corp. in an $8.4 billion all-stock deal makes it official: The long-awaited Permian Basin buying spree has arrived, promising to shake up the U.S. shale industry.

Some $30 billion in transactions this year center on the Permian, where pipeline shortages and other hurdles have boosted costs, adding fresh momentum to the push for consolidation. In March, Concho Resources Inc. agreed to pay $9.5 billion including debt for RSP Permian Inc. In July, BP Plc said it would spend $10.5 billion across three U.S. shale plays, including the Permian.

“There will be further consolidation over time for sure,” said Leo Mariani, an Austin-based analyst at NatAlliance Securities. “There are a lot of players in the Permian and a lot of economies of scale can be achieved such as lower-cost debt and reducing competition for services.”

At the end of last year, Energen owned drilling rights for about 150,000 acres across the Permian, which stretches across West Texas and New Mexico. The driller was“undervalued” amid a tussle with three activist investors, Mariani said in a telephone interview. “They were seeing some pressure.”

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The $84.95 per-share price represents a 16 percent premium to Energen’s closing price Tuesday. Diamondback will also assume $830 million in Energen debt in a deal approved by both boards, the Midland, Texas-based company said in a statement Tuesday.

Analysts have long predicted a wave of consolidation in the Permian, a remote region where the drilling renaissance was pioneered by dozens of independent wildcatters. Output in the basin is expected to rise to 3.42 million barrels a day in September, according to Energy Information Administration forecasts, more than double the production five years ago.

“Our industry has transformed into a manufacturing business and those operators that convert resources into cash flow at the lowest cost will win in the long run,” Diamondback Chief Executive Officer Travis Stice told analysts on a conference call Wednesday.

Diamondback shares fell 10 percent to $120.13 at 9:45 a.m. in New York; Energen, based in Birmingham, Alabama, jumped 4.4 percent to $76.37.

The move comes a week after Diamondback announced it was buying closely held Ajax Resources LLC for $1.2 billion in cash and stock, the holder of rights to 25,000 Permian acres. The two deals are set to make Diamondback the third-biggest producer in the Permian among companies focused on the region, the company said.

In July, PricewaterhouseCoopers LLP predicted that the second half of 2018 would see a boom in oil and natural gas mergers and acquisitions, given that dealmaking conversations already were “at a fever pitch” following a slow down in M&A earlier in the year.

Deal Frenzy Swells With Diamondback's $8.4 Billion Shale Buy

Activists including Carl Icahn, Paul Singer’s Elliott Management Corp. and Keith Meister’s Corvex Management had pressed Energen to seek a buyer, arguing its management had failed to wring full value from its acreage in the heart of the Permian. Corvex last year moved to call a special meeting of shareholders to remake Energen’s board, prompting a lawsuit from the company.

The two sides announced a settlement in March, with Energen agreeing to expand its board and conduct its review.

Meister praised the deal on Tuesday, saying it delivers “significant” gains for Energen shareholders. The new Diamondback “should be poised for many years of growth at an industry-leading cost structure,” he said in an interview.

Deal Frenzy Swells With Diamondback's $8.4 Billion Shale Buy

Energen started life as an Alabama natural gas utility, but shifted its main focus to exploration and production after acquiring drilling rights in the Permian. It agreed to sell Alabama Gas Corp. to the Laclede Group for $1.28 billion in cash in 2014 to raise money to accelerate drilling.

“Over the past five years, Energen has strategically divested noncore assets and transformed into a low-cost Permian Basin pure-play with what we view as a firm foundation for growth,” Bloomberg Intelligence analyst Michael Kay said in a note to clients in May.

Citigroup Global Markets Inc. acted as Diamondback’s financial adviser and Akin Gump Strauss Hauer & Feld LLP as legal adviser, according to the statement. J.P. Morgan Securities LLC and Tudor, Pickering, Holt & Co. were financial advisers to Energen and Wachtell, Lipton, Rosen & Katz provided legal advice.

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