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Diamondback Pays $538M for Permian Basin Assets

Stocks in this article: FANG

HOUSTON (The Deal) -- Midland, Texas, oil and gas explorer Diamondback Energy (FANG - Get Report) agreed to buy properties for $538 million, boosting its acreage in a hot area of the Permian Basin and delivering a three times return for the private equity backer involved, according to a person close to the situation.

The properties were largely in Midland and western Glasscock Counties, Texas, Diamondback said on Monday. The company didn't name the sellers, but according to a filing with the Securities and Exchange Commission, they included Quantum Energy Partners-backed Rio Oil and Gas LLC, Bluestem Energy LP and Crump Energy along with BC Operating Inc., Crown Oil Partners V LP and Crump Energy Partners V LP and their affiliates.

Quantum tripled its money on the sale, a source close to the situation said.

The deal implies $30,000 to $35,000 per undeveloped acre, the highest range of metrics seen in Midland basin over the past six to 12 months, Tudor, Pickering, Holt & Co. Securities Inc. wrote in a report. However, the firm expects the deal to be modestly accretive to its $100 per share proved, probable and possible net asset value for the company after layering in drilling acceleration and equity financing.

Topeka Capital Markets analyst Gabriele Sorbara said while the acquisition is on the expensive side at $103.46 per proved barrel of oil equivalent, $247,584 per flowing barrel of production and $27,722 per acre (after backing out a value for the acquired production), the acreage is in the core area of the play and accretive to its market metrics.

The 13,136 net acres will boost Diamondback's position in the basin to 85,000 net acres.

The properties produced 2,173 barrels of oil equivalent per day in May from 94 net wells and had net proved reserves of 5.2 million barrels of oil equivalent based on Diamondback's estimates as of June.

The acquisition is expected to close in early September. Diamondback plans to finance it with equity and availability under its borrowing base.

Separately, Diamondback said it priced 5 million shares at $87 per share, representing net proceeds of $421.7 million. Credit Suisse Securities (USA) LLC is sole book-running manager for the offering.

After the acquisition, Diamondback will have liquidity of $257 million, including $255 million available under its $350 million borrowing base (excluding the $55 million revolver at publicly traded unit Viper Energy Partners LP) and around $2 million in cash, Sorbara estimates.

Diamondback has bought $1.4 billion worth of properties in the Midland and Permian basins in less than a year. In February it agreed to pay $288 million for 4,683 net acres representing a 72.6% working interest, or around $27,000 per acre.

The area has been a hot one for deals, with Athlon Energy Inc. announcing in April it was acquiring producing properties and undeveloped acreage on the western side of the northern Midland Basin from various sellers for $873 million in cash, or around $25,000 per acre.

General Counsel Randall Holder and Deputy General Counsel Marc Dingler were inside counsel for Diamondback, which used Akin Gump Straus Hauer & Feld LLP's Michael Byrd, Seth Molay, Cody Carper and Rahul Vashi for outside counsel.

CIBC advised the sellers, including Joe Small, Joel Saber, Richard Griffis, Grant Butkus and Mark Nelson. Locke Lord LLP provided legal counsel with a team that included Terry Radney, Mitch Tiras, Dale Smith and J. Hunter Summerford.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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