Diamondback Energy (FANG) said Wednesday it agreed to buy oil and gas properties and related assets in West Texas' Southern Delaware Basin for $560 million, signifying a new operating area for the company.
The Midland, Texas-based company didn't reveal the name of the seller, but a source said it was Natural Gas Partners-backed Luxe Energy. None of the parties responded to requests for comment.
NGP committed $500 million to Austin, Texas-based Luxe - led by former Burlington Resources and Brigham Exploration executives - in May of last year. In January the company picked up 18,000 undeveloped and producing acres in Reeves and Ward Counties from Endeavor Energy Resources LP and Finley Resources Inc. for an undisclosed sum.
The deal gives Diamondback 19,180 net surface acres primarily in Reeves and Ward counties, about 1,000 barrels of oil equivalent per day of net production, net proved developed reserves of 2.2 million barrels of oil equivalent and salt water disposal infrastructure and additional assets valued at $10 million to $15 million.
The company said there are 290 net identified potential horizontal drilling locations across four zones with additional upside potential in other zones and through downspacing. It said the properties' contiguous position supports average lateral lengths of 9,500 feet.
Analysts at Tudor, Pickering, Holt & Co. said the deal sets a new high-water mark for the basin of $26,000 to $27,000 per acre, versus recent deals that fetched $10,000 to $20,000 per acre. But they think the deal is still cheap versus their valuation estimates of $40,000 per acre over time. "We continue to see this area potentially approaching or exceeding legacy Midland transactions in 2017," they said, noting properties in that area sell for around $30,000 per acre.
Pearce Hammond, an analyst at Piper Jaffray unit Simmons & Co. International, said the acquisition price may seem high relative to recent deals in the area, but the location along the Pecos river in the core of the play might explain the premium valuation. "We continue to like FANG long term, but would not be surprised if the shares underperformed the group today on all the new information," he said.
Analysts at Seaport Global Securities said they still find the acquisition compelling considering that the acquired acreage lies in the "core of the core" of the basin with high recovery expectations and stacked reserves, the contiguous nature of the acquired assets that should allow the company to drill long lateral wells and its lower cost of entry relative to its Midland Basin assets.
"The deal also supports our theme that the Delaware Basin is getting considerably better from both a productivity and cost standpoint," they said. They note the news may have a positive effect on nearby operators such as Anadarko Petroleum (APC) , Concho Resources (CXO) , Clayton Williams Energy (CWEI) , Energen (EGN) , Noble Energy (NBL) , Occidental Petroleum (OXY) , Parsley Energy (PE) and Cimarex Energy (XEC) .
The deal is expected to close in September, bringing its total leasehold to 105,000 net acres. It plans to finance the deal with cash on hand and up to $582 million in proceeds from a stock offering.
Diamondback CEO Travis Stice said the company's entrance into the Delaware Basin represents another strategic milestone for the company. "The acreage sits within the most coveted area of the Southern Delaware Basin and has significant multi-zone and long-lateral potential," he said. "With Diamondback's proven ability to execute, we now believe we have a path to achieve 100,000 boe/d in daily production in the coming years."
Stice added that with a much lower cost of entry than in the Midland Basin and its "peer leading costs," management expects to maintain the company's "best-in-class" leverage metrics as it grows. "We are excited to add another core asset to our portfolio and intend to operate a dedicated rig there next year," he said.
The CEO said Diamondback's recently added fourth rig will put it in a position of strength exiting the year and enable it to have double digit production growth next year while spending within cash flow at a $55 price environment. He noted good early performance from its Glasscock and Howard County wells.
Diamondback also boosted its 2016 production expectations to 38,000 to 40,000 barrels of oil equivalent per day, up 11% from the midpoint of February's guidance, as a result of increasing activity from three to four rigs in the second half of this year and continued strong well performance. It also increased its 2016 capital expenditure guidance to $350 million to $425 million from $250 million to $375 million previously.
The company said that if commodity prices continue to strengthen, it could add a fifth rig in the fourth quarter.