Oil, what changes after the all-American agreement between Diamondback and Endeavor
Two major Texas oil companies, Diamondback and Endeavor, will merge in a $26 billion deal. Yet the new company will reduce, rather than increase, the number of active wells: what is happening? All the details
Diamondback Energy and Endeavor Energy Resources, two major Texas oil companies, announced Monday that they will merge into one company. The deal, valued at $26 billion and expected to close in the fourth quarter of the year, is the latest example of a consolidation trend in the U.S. energy sector.
WHAT DIAMONDBACK AND ENDEAVOR DO
Diamondback and Endeavor are both active in the Permian basin, a rich oil field between Texas and New Mexico which in the last decade has transformed the United States into the leading crude oil and natural gas producing country in the world: thanks to technological innovation and more precisely, hydraulic fracturing processes ( fracking ), which allowed access to the hydrocarbons contained in shale rocks.
The merger between the two companies will take place through a cash-and-stock deal, with Diamondback shareholders – starting with Vanguard Groups, Wellington Management and BlackRock – getting 60 percent of the new entity.
Diamondback, founded in 2007 and publicly traded since 2012, reported revenue of $9.6 billion and profits of more than $4 billion in its latest fiscal year. Its market value is around 27 billion.
Endeavor, on the other hand, is older: it was founded in 1979 by Autry Stephens, today the richest oilman in the United States with assets of almost 15 billion dollars. Stephens is eighty-five years old and – as the New York Times points out – has chosen to sell at a good time, considering the wave of acquisition and consolidation agreements in the sector: the most important operation in this sense, worth 60 billion dollars, was ExxonMobil's purchase of Pioneer Natural Resources .
ALL THE NUMBERS OF THE NEW COMPANY
The new company that will be born from the combination of Diamondback and Endeavor will have a production capacity of 816,000 barrels of oil and gas per day over an area of over 3,300 square kilometers: it will therefore be the third largest producer of hydrocarbons in the Permian basin, after ExxonMobil and Chevron.
In addition to its size, it appears that it will also be a very efficient company, with a break even (the value needed to break even production costs) below $40 a barrel, compared to the average of $76 a barrel for West Texas Intermediate, the US oil reference. Reuters explains that Endeavor has managed to keep its operating costs low by using its own machinery and drilling, construction and transportation services, rather than relying on third-party suppliers.
ALL ACQUISITIONS IN THE AMERICAN OIL INDUSTRY
As mentioned, the largest deal in the American oil sector was the one between ExxonMobil and Pioneer last October, which made Big Oil the largest operator in the Permian basin. A few days later, however, another large company, Chevron, announced the purchase of Hess Corporation for 53 billion dollars: rather than in the Permian basin, however, Hess' truly valuable assets are found in Guyana.
In December, however, Occidental Petroleum announced the purchase of CrownRock, active in the Permian, for 12 billion dollars; in 2019 the company acquired, again in the Permian basin, Anadarko Petroleum for almost 40 billion.
WHY WILL DIAMONDBACK REDUCE DRILLING WELLS?
Diamondback has specified that, after the acquisition of Endeavor, it will progressively reduce the number of drilling wells, from the current twenty-six to twenty or twenty-two. A decision that might appear absurd but which is instead perfectly coherent, as Startmag has been explaining for years : the shareholders of oil companies do not want spending on production growth, also given the uncertainties about oil demand in the long term; on the contrary, they ask for fiscal discipline and substantial dividends.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/energia/fusione-diamondback-endeavor-26-miliardi/ on Tue, 13 Feb 2024 15:13:42 +0000.