Diamondback Energy stock experienced a remarkable surge of 10% on Monday following its agreement to acquire Endeavor, a distinguished oil and gas producer based in Midland, Texas. This significant increase is unusual as acquirers generally face a decline in their stock prices after deals, particularly when existing shareholders are diluted due to stock usage as a means to partially finance the acquisition. As an example, Exxon Mobil's stock plummeted after its agreement in October to purchase Pioneer Natural Resources, a company with similarities to Endeavor.
However, the Diamondback-Endeavor deal possesses unique characteristics that defied this trend observed in recent oil acquisitions. Firstly, the fact that Endeavor is a private company profoundly affects trading surrounding the deal. Typically, certain traders engage in a strategy known as merger arbitrage by shorting the acquiring company's stock and purchasing shares of the acquisition target. This tactic often leads to a decrease in the acquiring firm's stock value. Nonetheless, due to Endeavor's private status, this common approach does not apply in the usual manner, as explained by Roth MKM analyst Leo Mariani.
Another crucial factor contributing to the rise in Diamondback's stock price is the recognition of Endeavor as a high-quality company with exceptional assets located in the Permian Basin. Mariani emphasizes that this region, spanning across Texas and New Mexico, stands as the most productive oilfield in the United States by a considerable margin. Furthermore, it is projected to serve as the primary source of growth for domestic oil production throughout the upcoming decade.
As a result of these remarkable circumstances, Diamondback Energy's stock has witnessed an extraordinary surge in value. This acquisition provides an opportunity for Diamondback to strengthen its position and tap into the immense potential offered by Endeavor's outstanding assets in the thriving Permian Basin.
Diamondback's Acquisition of Endeavor: A Quality Asset
Diamondback's recent acquisition of Endeavor is expected to significantly enhance the company's inventory life and contribute to its long-term growth. The purchase is seen as a testament to the quality of Endeavor's assets and an opportunity for Diamondback to establish itself as a leading player in the oil and gas industry.
According to Raymond James analyst John Freeman, the merged company is set to become the most efficient large-cap oil producer in his coverage, surpassing its closest competitor by approximately 10%. This highlights Diamondback's ability to maximize oil and gas production while optimizing its expenditure.
Flow Partners, a reputable source for tracking drilling operations, reveals that Diamondback will have the second-highest number of drilling rigs in the Permian Basin, trailing only Exxon. Endeavor has emerged as a standout performer in the Permian region, experiencing rapid production growth amidst the challenges posed by the pandemic.
Tom Loughrey, President of Flow Partners, noted that Endeavor has significantly surpassed the overall growth rate of the Midland Basin, a sub-basin within the Permian. Since the beginning of 2020, Endeavor's daily oil production has surged by an impressive 74%, while the Midland Basin as a whole has only achieved a modest 16% increase.
Although some anticipate that Diamondback's growth rate may taper off after the completion of the acquisition, with a projected production increase of approximately 2% by 2025, the exceptional productivity of Endeavor's fields suggests favorable prospects for the combined entity in the long run.
Overall, this acquisition underscores Diamondback's commitment to solidify its market position and capitalize on Endeavor's remarkable assets. As they join forces, Diamondback and Endeavor are poised to create a formidable synergy that will shape the future of the oil and gas industry.