Diamondback Energy continues wave of consolidation among US shale operators

Company agrees to buy QEP Resources and Guidon Operating in deals worth a combined $1.4bn

Wind turbines operate at sunrise in the Permian Basin. Diamondback's two acquisitions announced on Monday strengthen its position in the sub-basin around its headquarters in Midland, Texas. Reuters

Diamondback Energy rounded off a tumultuous year for the US shale industry with the acquisition of two rivals for about $1.4 billion that will expand the company’s position in the Permian Basin.

Diamondback agreed to buy shale explorer QEP Resources in an all-stock deal that values the target at $2.29 per share, or about $555 million, the buyer said on Monday in a statement.

Separately, Diamondback announced the purchase of closely-held Guidon Operating. That cash-and-stock transaction values Guidon, which was co-founded in 2016 by funds managed by Blackstone Group, at about $862m.

“These trying times can present great opportunities for companies that are prepared,” Diamondback chief executive Travis Stice told analysts and investors during a conference call. “These acquisitions check every box when it comes to Diamondback’s corporate development strategy.”

The acquisitions are a bet by Texas-based Diamondback on the resilience of the shale sector, where production has dropped following this year’s historic collapse in crude prices. The deals are Diamondback’s largest since its $7bn takeover of Energen Corporation in 2018, and will bring its total leasehold interests to over 276,000 net surface acres in the Permian’s Midland sub-basin.

Diamondback said QEP’s assets in the Williston Basin in the Dakotas and Montana are “non-core” and will be used as a cash generator or sold off. Diamondback shares dropped 6.7 per cent to $42.76 at 10.06 am in New York on Monday. QEP fell 9.1 per cent to $2.10.

Although the assets to be acquired represent a “solid fit” with Diamondback’s existing operations, “these deals add nearly $2bn in net debt to [its] balance sheet, which is not exactly what we think the market is looking for the company to do right now and is counter to the company’s plan to prioritise absolute debt paydown in 2021,” Leo Mariani, an Austin-based analyst at KeyBanc Capital Markets, wrote in a note to clients.

Prior to Monday’s announcements, Diamondback’s stock had almost doubled in the space of less than two months.

“Fortunately for us, the rally in the last couple of months has allowed us to have real conversations and get two deals done,” Diamondback chief financial officer Kaes Van’t Hof said during the call.

The moves appear to conflict with Diamondback’s most recent public statements about already holding sufficient scale to compete, analysts at Tudor, Pickering, Holt & Co wrote in a note to investors.

However, the deals align “with management’s acquisitive track record and comments about generally supporting industry consolidation”, according to the note. “The no-premium transactions add relatively top-tier exposure” to Diamondbacks’s existing asset base and ideally closes the book on any more deals in the near-term.