Energy Prospectus

After listening to FANG's conference call this morning, I have updated my forecast/validation model for FANG. It will be posted to the EPG website this afternoon. You can download it directly from the EPG website home page.

My current valuation of FANG increases by $16 to $195/share.

The merger with Endeavor Energy (a private company), which has a pristine balance sheet and lots of Running Room is as close to a perfect deal as they come. Endeavor's office is actually across the street from Diamondback's office and their assets are in the Company's core area.

The merger won't close until Q4, so it won't be reflected in Diamondback's reported results until after it closes. However, Diamondback will get the full benefit of Endeavor's operating cash flow in 2024. Combined free cash flow in 2025 should be close to $5.5 billion.

There is upside to my valuation because (a) my 2025 forecast includes a $1 billion cushion, (b) Diamondback has a long-history of under-promising and then over-delivering on their guidance, and (c) cost savings / "synergies" expected to be generated post-merger are likely to be better than what my 2025 forecast is based on. FCF after dividends will be used primarily to fund the cash portion of the merger and then rapidly paydown debt, so my model does not include stock buybacks, which could be significant.

Lots of the Wall Street Gang were on the conference call, so I expect a lot of them to increase their price target as well.

PS: This merger should add a lot of upside for Viper Energy (VNOM), one of the four mineral's companies in our High Yield Income Portfolio. Endeavor owns a lot of minerals, which I expect Diamondback to dropdown into Viper. Plus, post-closing there will be ~20 rigs drilling on Viper's minerals. If you are not familiar with Viper, download my recent profile on the Company that you can find under the High Yield tab on our website.

Ponder this:
Based on my forecast, Diamondback should generate close to $10 Billion of operating cash flow (row 56) in 2025. < Post-Closing of the $26 Billion merger with Endeavor, Diamondback will have more production and operating cash flow than what Pioneer Natural Resources (PXD) had in 2023..  PXD is being acquired by ExxonMobil for $60 Billion.

Today, Diamondback's market-cap is ~$30 Billion.

On this morning's conference management of Diamondback said that the minerals owned by Endeavor would be dropped down into Viper Energy (VNOM), increasing Viper's production by ~60%.

I have updated my forecast model for Viper. My valuation increases by $4 to $43/share.

Based on my forecast, Viper's dividends in 2025 could be $4.00 for the year. Today, VNOM is trading for $32.73.

When FANG executes the drop down of Endeavor minerals into VNOM, customarily additional shares will are issued to FANG commensurate with the value of the minerals to the share price of VNOM at the time. I am not clear how you are coming up with an increase in the value of VNOM or over 10% based upon the expected drop down transaction. Am I missing something?

That said in my view is this is likely the best deal seen recently in the oil space. FANG has top notch management and I expect them to continue excelling in the Permian. They have stayed very focused on what they are best at and it certainly should continue to show up in their share price.

https://x.com/crudegusher/status/1757173156299559271?s=20

I am not sure how Viper will pay Diamondback for the minerals so I increased interest expense and added a $30 million "cushion" in 2025. I just think the additional scale and drilling activity on their minerals deserves a higher valuation.
FANG: I agree, this merger will create a very large and very valuable company. The "tone" on the conference call from the Wall Street Gang was quite bullish to me. Obviously, the market likes the deal.

I like Sankey's comments.
To his potential buyers or sellers in the Permian, I'd add PR, MTDR, SM and VTLE.
In my opinion, a PR + MTDR merger would be interesting, but MTDR might not be interested in any deal. PR and MTDR are both focused on the Delaware Basin, so the merger makes sense.
VTLE is a pure play Permian Basin that no one but me seems to appreciate.
SM is a Permian Basin + Eagle Ford company. SM + VTLE might make sense.

I was surprised that Sankey mentioned OVV as a potential buyer. That is interesting. OVV is a large-cap (573,000 Boepd) that doesn't get the attention it deserves. OVV is a bit too "gassy", so a takeover of a company like MTDR might give it a better mix.

EOG has more than enough Running Room and doesn't need to make any kind of deal, but it might join the M&A party as a Buyer.

Sankey is thumbs down on the DevonEnerplus deal due to Devon’s poor performance with recent acquisitions in Bakken. Rather Sankey would have Devon dispose of all non Permian assets, pay off all debt, and execute in Permian. So by inference they would be well advised to ditch Enerplus, make deal to buy/merge PR and sell all non Permian, harvest cash and send to shareholders.