Diamondback Energy's (FANG) $26 billion acquisition of Endeavor Energy highlights the rapid-fire consolidation that has swept across the US Permian Basin — which includes parts of West Texas and southeastern New Mexico — as oil and gas producers scoop up domestic acreage.
Shares of Diamondback rose more than 8% as Wall Street cheered the merger announced on Monday along with the Midland, Texas company's better-than-expected revenue outlook for 2024.
"We believe the deal should benefit FANG in the long term," said Jonnathan Handshoe, equity analyst at CFRA Research, which has a Buy rating on the stock. "The merger, if completed, would make FANG the third-largest producer in the Permian Basin."
Diamondback's production capacity would increase by 76% and net acreage by around 70%. The combined entity's locations would break even if West Texas Intermediate (CL=F) were to trade below $40 per barrel, according to the merger announcement. WTI is currently trading around $77 per barrel.
'Land grab' due to lack of investment
The deal to buy Endeavor, also based in Midland, follows a string of merger announcements including Chevron's (CVX) acquisition of Hess (HES) and Exxon Mobil's (XOM) agreement to buy Pioneer Natural Resources. Occidental Petroleum (OXY) also announced a deal to buy privately held oil and gas producer CrownRock.
"What you're seeing is a land grab consolidation due to lack of reinvestment in inventory over the last 10-15 years," Matt Willer, managing director of capital markets and partner at Phoenix Capital, told Yahoo Finance. "We're not making more acreage."
He added: "Everyone knows where the oil is, and so you start to take a look at [it] and say, 'Alright, who is sitting on top of it and how might we bolster our portfolio in an acquisition to backfill what we didn't do in active reinvestment over the last decade?'"
'They have to lower their operating costs'
The Permian Basin was once a more fragmented region made up of smaller operators. Technological advances over the years has made drilling in the region more cost-effective and attractive for the major oil and gas companies.
"At this point the upside from exploration is gone. The geology is very well known. They know the technology now well, " Ed Hirs, economist and energy fellow at the University of Houston, told Yahoo Finance. "There really will be savings ... you don’t need extra CFOs, CEOs."
A by-product of oil drilling is natural gas, often referred to in the industry as associated gas. As operators drill further into the ground, the gas-to-oil ratios on wells increase.
Hirs said companies have been forced to lower costs amid an oversupply of associated gas. "As the wells turn more gassy, they have to lower their operating costs," he said.
The US saw record output last year, offsetting production cut moves by Saudi Arabia and other oil producers aiming to keep crude prices higher.
The recent consolidation will likely shift more supply market control to the larger players overseeing the highest producing acreage in the Permian Basin.
"If the larger majors can collectively have a more complete foothold on the market, then they can control pricing and one way to do that is to temper the new production. I think that's what we're going to anticipate seeing in the latter half of 2024," said Willer.
The Energy Information Administration recently lowered its US oil output forecast for this year, predicting monthly production won't surpass its December 2023 record again until February 2025.
Ines Ferre is a senior business reporter for Yahoo Finance. Follow her on Twitter at @ines_ferre