(Aug. 14) – In a much-speculated-about move – pushed along by activist investors – Midland-based Diamondback Energy Inc. said after the markets closed Tuesday that it had agreed to acquire Energen Corp. for $9.2 billion in stock and assumed debt.
The deal creates the third largest independent oil and gas producer focused on West Texas’ Permian Basin.
Akin Gump Strauss Hauer & Feld won the work from Diamondback, whose general counsel is Randall Holder. Corporate partners Seth Molay and Matt Zmigrosky led the deal from Dallas along with a partner in the firm’s New York office.
Other Texas attorneys on the team were partner Alan Laves and associate Kathryn Betts in Dallas on corporate matters and partner Michael Byrd, counsel Stephen Boone and senior practice attorney Shane Sullivan in Houston on oil and gas. Other firm attorneys in New York, Los Angeles and Washington, D.C. worked on the deal.
Diamondback tapped Citi for outside financial advice on the deal, including Fritz Schlopy, Serge Tismen, Doug Mackenzie and Logan Free.
Wachtell Lipton Rosen & Katz provided outside counsel to Energen. JP Morgan and Tudor, Pickering, Holt were the company’s financial advisors, including Jonathan Sloan, Nathan Craig and Andrew Castaldo at JPM and Travis Nichols, Maynard Holt and Lance Gilliland at TPH.
The deal was announced less than a week after Diamondback’s purchase of northern Midland Basin properties owned by Kelso-backed Ajax Resources for $1.2 billion in cash and stock. Akin worked on that transaction as well, including Byrd, Molay, Zmigrosky, Boone and Sullivan.
Last year analysts thought that Diamondback could merge with Energen or RSP Permian, both of which were active in the Permian. RSP Permian was picked up earlier this year by Concho Resources in a deal valued at $9.5 billion.
Analysts at Seaport Global Securities said they’re fans of the deal as it addresses the one weakness in Diamondback’s game – its depth of inventory – and does so in an accretive fashion. “We now see more than 15 years of pro forma drilling inventory versus 11 years for FANG [Diamondback] standalone,” they said.
Activist investors Corvex Management, Carl Icahn and Elliott Management have been pressuring Energen to pursue a sale, claiming that management wasn’t realizing the full value of its oil and gas properties.
Under the terms of the deal, Energen unitholders will get 0.6442 of a share of Diamondback stock for each Energen share they hold. The swap represents an implied value of $84.95 per share, a 16 percent premium over Energen’s closing price Tuesday.
Some analysts have thought the company is worth more, with Merrill Lynch setting a $94 per share price objective for the stock recently based on expected Ebitda in 2020 and a bottom-up risked net asset value.
Diamondback also will assume Energen’s net debt, which was $830 million as of June 30.
Both companies’ boards have approved the deal, which requires clearance from both sets of shareholders and regulators. The deal is expected to be completed by year-end.
Diamondback shareholders will end up with 62 percent of the combined company while Energen shareholders will hold 38 percent.
Diamondback said the combination would have peer-leading production growth, cost structure and capital efficiency with 266,000 net tier one acres in the Permian, up 57 percent from Diamondback’s current holdings. The merged companies also would have an estimated 7,000 net horizontal Permian locations, up 120 percent from Diamondback’s current locations.
The two together produced 222,000 barrels of oil equivalent per day in the second quarter, the third largest production for a pure play company in the Permian and a 79 percent increase over Diamondback’s production.
Diamondback expects the deal to immediately add to earnings per share and cash flow per share next year and provide $2 billion in annual synergies starting next year, including well cost savings of $200 per lateral foot and general and administrative savings of $30 million to $40 million per year.
The buyer also expects secondary synergies post-integration of $1 billion or more from capital productivity, economies of scale, overlapping and adjacent acreage in some areas and lower lease operating expenses, among other things.
Diamondback said it expects to maintain its dividend but will assess a possible increase next year. It believes the deal will lead to a lower cost of capital and an accelerated path to an investment grade rating.
Diamondback CEO Travis Stice said in a statement that the deal is transformative for Diamondback and Energen shareholders as they will
benefit from owning the top large cap Permian independent with industry-
leading production growth, operating efficiency, margins and capital
productivity.
“This transaction also adds critical mass for driving capital efficiencies in what is now truly becoming a manufacturing business,” he said.
Energen chairman and CEO James McManus said the transaction with Diamondback is the best path forward for the company and provides the company’s shareholders with an excellent value for their investment, “now and in the future.”