Energy Prospectus

Aug 14 (Reuters) - U.S. oil and gas company Diamondback Energy Inc said on Tuesday it would buy Energen Corp in an all-stock deal valued at $9.2 billion to expand in the Permian Basin.

Energen was under pressure to sell itself by activist investors Corvex Management, Icahn Associates and Elliott Management.

The acquisition will increase Diamondback's current Permian Basin Tier One acreage of 170,000 acres by 57 percent.

Diamondback's implied offer of $84.95 per Energen share represents a premium of about 16 percent to Energen's Tuesday close. The transaction includes $830 million in net debt.

Energen shares rose 6.6 percent to $77.95 in after-market trading, while Diamondback shares fell 7.8 percent to $123.30.

Citigroup Global Markets Inc is the financial adviser to Diamondback, while J.P. Morgan Securities LLC and Tudor, Pickering, Holt & Co are financial advisers to Energen.

HOUSTON, Aug 15 (Reuters) - Diamondback Energy Inc shares fell 10 percent early on Wednesday following the U.S. oil and gas producer's all-stock, $9.2 billion deal for shale rival Energen Corp.

On Tuesday, Diamondback agreed to pay about $84.95 per share for Energen, a 16 percent premium to the Birmingham, Alabama, company's close on Tuesday. Energen shares rose 3.8 percent to $75.95 on Wednesday morning trade on the New York Stock Exchange.

Diamondback was down 10.4 percent at $119.83 per share on the NYSE. U.S. crude futures fell $2.25 to $64.78 per barrel in New York on Wednesday. The Dow Jones industrial average was down about 1 percent on Wednesday.

Activist investor Corvex Management LP, which holds about 8.3 percent of Energen and had pushed for a sale of the company, signaled it intends to support the deal. The acquisition must be approved by regulators and shareholders of both companies.

"The transaction is strategically compelling and delivers significant financial accretion to Energen shareholders," said Keith Meister, managing partner of Corvex Management. "The pro forma company should be poised for many years of growth at an industry leading cost structure."

The transaction, which includes assumption of $830 million in Energen debt, is expected to close by the end of year, Diamondback Chief Executive Travis Stice said on a call with investors on Wednesday.

Stice said the combined company could achieve $2 billion in synergies starting in 2019 and has the potential to add another $1 billion in cost savings and higher revenues thereafter.

"This transaction represents a transformational moment for both Diamondback and Energen shareholders as they are set to benefit from owning a milestone large-cap independent that is uniquely positioned to deliver unmatched growth and returns in the Permian basin," Stice said.

Activist investor Carl Icahn, who owns about 8.9 percent of Energen, was unavailable to comment Wednesday on whether he will support the sale.

The drop in Diamondback's share price reflected oil investors' worry the transaction could dampen the company's debt-adjusted production growth per share, said Michael Kelly, an analyst at investment bank Seaport Global Solutions LLC.

"Investors in the oil and gas space are a little skeptical of the synergies that can come from this and whether the share dilution is warranted," Kelly said, adding he views the transaction as a buying opportunity. (Reporting by Collin Eaton; Editing by Jonathan Oatis and Bill Trott)

A big winner on this deal medium to long term will be VNOM.
They are the oil trust set up by FANG and get periodic drop downs from FANG.
Fang gets bigger and that increases VNOM potential drop downs by 50%.

VNOM pays out most of their cash flow in the form of distributions, that is at a current rate of about 6%.


https://finviz.com/quote.ashx?t=VNOM

Here is part of their earnings call trans script.
"2018 has been an exceptional year so far for Viper as we have continued to grow production at industry-leading rates and recently announced our 7th consecutive company-record distribution.
We grew production 16% quarter-over-quarter and generated an annualized return on average capital employed of over 18%. Also, pro forma for the acquisitions closed were committed through July 23, our assets have grown by 30% compared to the first quarter of 2018 and over 80% compared to a year ago. "

Nice. Give it a read.

https://seekingalpha.com/article/419748 ... transcript

It is always puzzling to me that when these deals are announced that the Buyer's share price drops sharply. Does the Wall Street Gang think that Diamondback management and their board just woke up one morning and said "Hey let's just go buy Energen for $9.5 Billion and grossly overpay for it!".

I'm sure that Diamondback (a super sharp management team) did extensive due diligence on the Energen assets and ran the numbers at much lower commodity prices than we have today.

Yes, this does sound like a Big Plus for Viper, but my guess is that Diamondback will also look a heck of a lot better when the dust settles.

Zacks Equity Research Team:

"The deal seems to be quite a prudent move by Diamondback, as it is likely to be immediately accretive to the company’s earnings, net asset value and cash flow. The agreement will add around 96,000 acres of tier-1 Permian acreage to Diamondback’s portfolio, expanding its position by 57% to a total of 266,000 acres. Net Permian acreage of the combined company will stand at around 366,000 acres. Pro-forma production for the combined company in second-quarter 2018 was 222,000 barrels of oil equivalent per day (Boe/d), reflecting a 78% surge from Diamondback’s output of 124,700 Boe/d. Additionally, the strategic acquisition is expected to lead to significant commercial, financial and operational synergies, due to the integration of assets, systems and staff. The deal is expected to result in synergies of around $3 billion. The transaction aims to reduce costs through economies of scale."

Post-Merger Diamondback Energy (FANG) will have the 3rd largest leasehold position in the Permian Basin behind Concho Resources (CXO) and Pioneer Natural Resources (PXD).

https://finance.yahoo.com/news/diamondb ... 01828.html

Dan,

Using the same methodology you use to value the portfolio companies, what is the CFPS multiple inherent in this transaction?

You can find the multiple of operating cash flow per share that I use to value all of the Sweet 16 and other model portfolio companies at the bottom of each forecast/valuation spreadsheet.

For FANG, I am using 11X 2017-2019 CFPS
It deserves a high multiple because (a) it has a strong balance sheet, (b) is funding over 40% YOY production growth entirely with cash flow from operations and (c) it has decades of low-risk high-return development drilling inventory, most of which is already HBP. AND... all of the above make it a PRIME TAKEOVER TARGET.

Take a hard look at the RED BOX on the forecast spreadsheet and keep in mind that First Call's Cash Flow Per Share estimates beyond 2018 have not yet been updated to include the Energen merger. The numbers on row 54 are incredible!

What multiple if EGN’s CFPS did FANG pay in the acquision?

Teach a man to fish...

Go to the Energen 10Q and take a look at the Cash Flow Statement to see for yourself. Then come back here and tell us the answer.

When buying (or merging with) a company, the Buyer is looking forward. So, this might be more helpful.

From Reuters / First Call:
Energen's operating cash flow per share:
2017A = $5.83
2018E = $10.22
2019E = $13.57
2020E = $18.16

For this exercise, my team at Hess would take the average of 2018 to 2020 ($13.98 CFPS) and used a multiple of 6X as a reasonable starting point for a valuation ($83.88).
Obviously, a heck of a lot more goes into the valuation of a company, PRIMARILY the quality and "fit" of their undeveloped leasehold position. Keep in mind that HBP leasehold is worth a lot more. Because these lands will be developed with long horizontal wells, "fit" is extremely important.

No forecast of 2019 and 2H 2018 cash flow is available in their 10q.

Just thought since you had been thru the numbers this weekend and probably would want to validate your multiples used on all portfolio companies that this info would be readily at hand. Sorry for asking.

See my last post.

I appreciate the info and your insights. FANG indicated it was accretive. Will delve deeper when I have some analysis time.

All you have to do is look at the last two columns of the spreadsheet that I sent out this morning to see how accretive it is. Plus, my forecast is based on a very conservative YOY production growth estimate.

As pointed out previously VNOM will benefit from this deal. Looks like Mr Market agrees. Though oil is quite off it's highs of 3 weeks ago Vnom checked in with all time new high today.
https://finviz.com/quote.ashx?t=VNOM