Diamondback Makes Lario Permian Deal

Diamondback Energy, Inc. (NASDAQ: FANG) has announced that it has entered into a definitive purchase agreement to acquire all leasehold interest and related assets of Lario Permian, LLC, and certain associated sellers, in exchange for 4.18 million shares of Diamondback common stock and $850 million of cash.

The cash portion of the deal is expected to be funded through a combination of cash on hand, borrowings under the company’s credit facility and/or proceeds from a senior notes offering, Diamondback said. The company revealed that it expects the transaction, which it said is subject to customary closing conditions and adjustments, to close on January 31, 2023.

Diamondback outlined that its deal with Lario adds approximately 25,000 gross (15,000 net) acres in the core of the Northern Midland Basin and 154 estimated gross (132 net) horizontal locations in primary development targets with an average lateral length of over 9,400 feet. The company revealed that the transaction is immediately accretive to all relevant 2023 and 2024 financial metrics, including cash flow per share, free cash flow per share and NAV per share.

“Lario is an attractive bolt-on to our existing Martin County position, home to some of the best rock in the Permian Basin,” Travis Stice, the chairman and chief executive officer of Diamondback, said in a company statement.

“This is a deal that checks all the boxes Diamondback looks for in an acquisition, as it brings over 150 gross locations in the core of the Northern Midland Basin and also provides immediate accretion to all relevant financial metrics, enhancing Diamondback’s overall value proposition to our stockholders,” he added.

“When combined with our pending FireBird acquisition, we will grow our Midland Basin footprint by approximately 83,000 net acres, add 500 high quality drilling opportunities that compete for capital with our current development plan and increase our 2023 production profile by approximately 37 MBo/d (50 MBoe/d),” Stice continued.

Analyst Take

Enverus Director Andrew Dittmar, who highlighted that the deal has a value of $1.55 billion, noted that the transaction “walks the line of staying accretive to Diamondback’s 2023 EBITDA multiple and free cash flow yield while adding inventory that is immediately competitive in its portfolio”.

“In contrast to FireBird, the purchase from Lario is more immediately accretive to free cash flow but has less runway for undeveloped locations. The acreage is also more centrally located within the core development fairway of the Midland Basin relative to FireBird but scattered whereas the FireBird land was nearly in one contiguous block,” Dittmar added.

In both the Lario and FireBird cases, Diamondback is leveraging its position as a large-cap exploration and production company to consolidate opportunities within the Midland Basin, Dittmar pointed out.

“Large-cap E&Ps focused on oil like Diamondback, as well as other big buyers from 2022 like Marathon Oil and Devon Energy, are trading at an average of 5x EBITDA and a 14 percent yield on free cash flow whereas small-cap companies are trading at just 3x EBITDA and their stock price implies a yield of 20 percent on free cash flow,” Dittmar said.

“That puts those smaller companies at a significant competitive disadvantage when bidding on deals because they cannot offer the same value as larger companies without diluting shareholders. The challenging part is that smaller companies are, in many cases, much more in need of the inventory that is included in these acquisitions,” he added.

While the number of acquisition targets in the Permian, particularly targets with core acreage, have been narrowed by the acquisitions of Diamondback and others, there are still opportunities to find good deals in both the Midland and Delaware Basin, Dittmar said.

“And the emergence of large-cap buyers willing to offer higher prices, along with a bit of stability in crude prices, seems to have narrowed the bid/ask spread and helped deal flow accelerate,” he added.

“For those that think the Permian is getting too competitive again, other plays like the Eagle Ford that have more consolidation targets and fewer buyers may be put on the top of the list for deals. Investors seem willing to continue to support M&A as long as the deals stay accretive to key metrics, particularly free cash flow yields,” Dittmar continued.

To contact the author, email andreas.exarheas@rigzone.com