Diamondback Energy Inc. (NASDAQ: $FANG) is an independent oil and gas company founded in 2007 in Midland, Texas. It focuses on exploring and exploiting onshore hydrocarbons in the Permian Basin in West Texas.
Diamondback Energy Announces Merger
On Monday, February 12, 2024, Diamondback Energy announced a planned merger with Endeavor Energy Resources. According to the announcement, the transaction value of the merger is around $26 billion, including the net debt held by Endeavor.
The resulting company will be one of the leading independent fossil fuel companies in the Permian Basin, with unmatched inventory depth and capital efficiencies. It will own around 838,000 acres and a daily net production of around 816 MBOE/d.
To fund the merger, which was unanimously approved by Diamondback Energy’s board of directors, the company will issue around 117.3 million common shares and $8 billion in cash. Once concluded, Diamondback’s shareholders will own around 60.5% of the combined company, while Endevor’s stockholders will own 39.5%.
Diamondback’s Merger Offers Major Synergy Benefits
Commenting on the merger, Diamondback Chairman and CEO Travis Stice stated that it would create a ‘must own” independent oil company. He added that the new company’s inventory would be converted into cash flow at the lowest cost structure in the industry, creating value for its shareholders.
According to Stice, the merger met all criteria for success. He pointed to its “sound industrial logic with tangible synergies, improved combined capital allocation, and significant near and long-term financial accretion.” The CEO expects the new company to not only get bigger, but better as well.
The deal will create a company with best-in-class inventory depth with around 6,100 pro forma locations with break evens of less than $40 for WTI crude. It will also lead to annual synergies of $550 million, with over $3 billion in NPV10 in the next ten years. Additionally, it will lead to significant long and near-term financial accretion with around 10% free cash flow per share accretion projected by 2025.
2024 Diamondback and Endeavor Standalone Guidance
In its merger announcement Diamondback also provided some financial information on Q4 fiscal 2023 results. It projects an average Q4 2023 production of 273.1 MBO/d. For the fourth quarter, Diamondback expects capital expenditure of $649 million.
The company, on a standalone basis, expects to produce around 270-275 MBO/d in the full year 2024 on a capital budget of $2.3-$2.55 billion.
For the first quarter of fiscal 2024, Diamondback plans to reduce its return of capital commitment from around 75% of free cash flow to around 50% of free cash flow. The company also announced a 7% base dividend increase to $3.60 per share, or $0.80 per quarter, starting in Q423.
Endeavour expects oil production of 190–200 MBO/d in fiscal 2024 on a capital budget of $2.5-$2.6 billion. Its pro forma guidance will be released once the merger is concluded.
2025 Pro Forma Outlook
Once the merger is complete, Diamondback projects oil production of 470–480 MBO/d in 2025 on a capital budget of $4.1-$4.4 billion in 2025.
Diamondback Stock (FANG) Surges
Diamondback’s stock price saw significant positive movement on February 12, reaching $166.98 per share, a 10.04% increase from the previous day’s closing price of $151.74. Over the past 12 months, Diamondback’s stock price has changed by a modest 2.37%, contrasting with the S&P 500’s l52-week growth of 21.50%.
The current price is below Diamondback’s 52-week peak but above its 50-day and 200-day average prices. FANG stock’s average daily trading volume is 1.73 million shares, with a market capitalization of $30.207 billion.
FANG Stock Forecast
Analysts expect Diamondback to post an EPS of $4.75 for the fourth quarter of 2023 when results come out on February 20, a 10.21% Y/Y decline. Revenue is forecast at $2.19 billion in Q4, which is a 5.28% Y/Y increase.
Diamondback stock is currently rated a strong buy by Wall Street analysts. They forecast a broad target for FANG stock with a high of $240 and a low of $154. The average FANG stock forecast is $182.54, which is a 10.36% upside.
Final Thoughts
Diamondback’s impending $26 billion merger with Endeavor will bring about synergies, efficiencies, and growth in oil production volume. The combined company will be a significant player in the resource-rich Permian Basis, with the improved efficiencies expected to translate into stock price gains. Based on its promising merger and the consensus buy recommendation by analysts for FANG stock, buying it could lead to near-term portfolio growth.
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