What Happened: As a part of the $2.2 billion acquisition agreement, Diamondback will absorb QEP’s business along with the $1.6 billion debt that was outstanding on Sept. 30, 2020. The entire consideration of $2.2 billion will be paid in Diamondback’s stock. It will issue 0.05 Diamondback shares for each share of QEP.
Based on Diamondback’s closing price on Friday last week, the deal puts an implied value of $2.29 for each QEP share.
Diamondback is also buying all leasehold interests of oil exploration company Guidon Operating LLC for $862 million. The Guidon deal was original with QEP, but Diamondback is acquiring it now. Guidon deal is expected to close by Feb 2021.
Guidon deal includes a cash component of $375 million and the balance in Diamondback stock issue of 10.63 million shares.
Why Does It Matter: The coronavirus pandemic has dented oil demand, which led to a crash in crude oil prices in March 2020. A steep fall in oil prices has pushed many oil producers to the verge of bankruptcy, leading to consolidation in the oil-rich shale patch.
Diamondback’s portfolio will now include the Midland basin region — a material Tier 1 inventory. The management expects that the two companies’ synergies improve other key operational metrics like leverage, cash flow per share, and free cash flow per share in 2021.
This, along with a combined “drilled but uncompleted” wells in Diamondback’s 2021 portfolio, would reduce the reinvestment ratio next year.
The company management estimates that these deals could offer annual synergies in the range of $60 million to $80 million. Additionally, the agreement classifies QEP’s assets on the Williston basin as a non-core asset, which can be used to pay off a portion of the outstanding debt balance.
After the deal’s close, Diamondback will retain a 92.8% stake, and the remaining 7.2% will be held by QEP. However, the new shareholding pattern does not account for any share issue to settle QEP’s pending acquisition deals like the Guidon Operating LLC acquisition.
Price Action: On Monday, FANG closed 1.79% lower at $45.02, and QEP fell 3.46% to close at $2.23.
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