Shale twins’ $26 bln deal can afford to be pricey

Separated at birth. Diamondback Energy is paying up for Endeavor Energy Resources because it can. buyer said on Monday it will pay $26 billion, including debt, for private oil and gas company operating in Permian Basin. two firms bear an uncanny resemblance. se similarities mean Diamondback can reap more savings than rivals in fast-consolidating oil industry, justifying combination.

Autry Stephens started company that would become Endeavor about 45 years ago. He now joins club of old-guard oil tycoons, like Pioneer Natural Resources’ Scott Sheffield and Hess’s John Hess, in selling out. In doing so, he is fetching a handsome price.

Endeavor produced an estimated 353,000 barrels of oil equivalent per day in 2023’s last three months. That’s about three-quarters as much as Diamondback, which h a market value of some $33 billion including debt prior to news. Given companies’ many similarities, value each barrel of Endeavor’s capacity at same multiple as Diamondback, and seller would be worth less than $25 billion. Or consider that buyer is paying $4.7 million per core location, according to TD Cowen, while market values Diamondback’s locations at $4.1 million. Endeavor has wrested a decent premium from its suitor.

Diamondback can afford it, though. company says a tie-up should unlock $550 million of annual savings, with a present value of $3 billion over next dece. That seems plausible. Both firms operate only in Permian and ir acreage is intertwined - some $150 million of synergies come from combining land. Guidance for two firms’ combined capital spending in 2025 comes in at $700 million less than ir current separate plans for this year, yet production will be roughly same. Achieving se savings doesn’t even require a longer commute: companies’ Texas hequarters are a block apart.

cash-and-shares deal leaves Diamondback investors with over 60% of combined firm – and refore nearly $2 billion of value of synergies. That more than covers implicit premium being paid.

Investors look happy, sending buyer’s shares up nearly 10% Monday morning and ding almost $3 billion to its valuation. Competition to partake in oil consolidation wave - like Exxon Mobil’s $65 billion Pioneer Natural Resources deal, or Chevron’s $60 billion Hess purchase - could have incentivized reckless dealmaking, especially since Endeavor is one of biggest remaining independents located in heart of America’s shale boom. Diamondback and Endeavor's neighborly resemblance defrays that risk, but captures reward.