Diamondback Energy’s (FANG) shares plunged after the announcement that the oil and gas producer will acquire Energen EGN in all-stock deal valued at $9 billion, a 16% premium to the latter company’s previous closing price. We think this creates an attractive buying opportunity for investors, as Diamondback was already trading at a substantial discount to our fair value estimate and the price paid for Energen appears to be fair.
The combined entity will be one of the largest oil and gas producers in the Permian Basin, with about 390,000 net acres of unconventional leasehold and current volumes of 215 thousand barrels of oil equivalent per day (of which Energen is contributing 179,000 net acres and 90 mboe/d). This footprint is split fairly evenly between the Midland and Delaware basins and encompasses most of the counties in the play. The Tier 1 component by itself could support 15 years of further drilling at the current run rate. Much of the remainder is likely to be sold to bring the value forward, generating cash that can be used to accelerate the development of the core portion--all of which is in accordance with the company’s “grow and prune” strategy. As a bonus, the assets include substantial mineral interests that are ideal for dropping into Diamondback’s Viper Energy Partners (VNOM) subsidiary.
Dave Meats, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.