Diamondback Energy Inc. announced Tuesday that it has entered into an agreement to acquire more than 6,000 gross acres of leasehold in the Midland Basin, part of the Permian Basin of West Texas, from undisclosed third party sellers for approximately $174 million.
The company, an independent oil and gas company based in Midland, TX, said the transaction includes 6,450 gross (2,825 net) acres in Martin County, TX, with a 43.8% working interest (WI) and a 75% net revenue interest. The acreage recorded net production of approximately 1,600 boe/d in November 2013, about 75% of which was weighted toward oil, from 145 gross (63 net) producing vertical wells.
Diamondback said it believes the acquisition is prospective for horizontal drilling in six formations in the Permian: Clearfork, Cline, Lower Spraberry, Middle Spraberry, and Wolfcamp A and B. The company said it has identified 42 potential horizontal drilling locations targeting both the Wolfcamp B and Lower Spraberry, based on 160-acre well spacing (six wells across a section). Another 112 potential horizontal drilling sites were collectively found to target the Clearfork, Cline, Middle Spraberry and Wolfcamp A, based on 120-acre well spacing (four wells across a section).
"I am extremely excited about this pending acquisition in Martin County as it offers an opportunity for Diamondback stockholders to expand their exposure to what we believe to be the core area of one of the most prolific basins in North America," said CEO Travis Stice. "As a peer leading performer in horizontal development in the Permian Basin, and as a low cost operator, we believe these assets are as good as or better than our existing acreage position.
"Furthermore, when you compare this acquisition against our current valuation metrics, this represents another accretive acquisition for our stockholders."
Under the terms of the existing joint operating agreement, Diamondback has made offers to the owners of the remaining 56.2% WI to acquire their interests as well. The company said that if all of those owners sold their interests to Diamondback, it would wind up paying about $397 million for the deal.
The company said it plans to finance the acquisition -- which remains subject to certain adjustments, market conditions and other factors -- through a combination of borrowings under its revolving credit facility and the issuance of debt and equity securities. The deal is expected to close at the end of February.
Diamondback said it will become the operator of the acquired acreage if and when two or more WI holders totaling more than 50% of the WI appoint the company as successor operator. But the company warned that the transaction "remains subject to completion of due diligence and satisfaction of other customary closing conditions, and there can be no assurance that the transaction will be completed."
In a note Tuesday, Topeka Capital Markets analyst Gabriele Sorbana said Diamondback's buy status was reaffirmed and its price target raised to $72/share, up from $70/share. Shares of Diamondback, which is listed under the ticker symbol FANG, were at $60.78/share (up 1.91%, $1.14/share) in midday trading Tuesday on NASDAQ.
"We sense that management has a high degree of confidence in acquiring these additional working interests," said Sorbana. "Based on our calculation, the transaction is accretive across all metrics."
Sorbana added that with the acquisition, Topeka believes Diamondback can exceed its previously issued production guidance of 15.0-16.0 Mboe/d. The analysts raised their production estimate to 17.0 Mboe/d, up from 15.8 Mboe/d.
Diamondback said it estimates net proved reserves for the acquisition totaled approximately 4,185 Mboe as of Dec. 31, 2013. By comparison, the company held 63.6 million boe of proved reserves on the same date, according to Diamondback's most recent investor presentation, issued this month.
"Our estimate of proved reserves is based on our analysis of production data provided by the sellers, as well as available geologic and other data, and the company may revise its estimates following ownership of these properties," Diamondback said.
Diamondback's investor presentation shows the company currently holds more than 67,000 net acres, of which more than 99% is operated. It has currently deployed four horizontal rigs and one vertical rig, and plans to add a fifth horizontal rig during 2Q2014. Proved reserves were 67% oil, 17% natural gas liquids (NGL) and 16% natural gas. The company said 47% of its proved reserves are classified as proved developed.
In a separate transaction, Diamondback acquired about 15,000 gross (12,500 net) acres in Midland County, TX, in September 2013 for approximately $440 million, with wells targeting the Lower and Middle Spraberry and Wolfcamp B formations. The company receives about an average 20% royalty interest on all production from that "Spanish Trail" acquisition, which had an estimated net production of 2,100 boe/d in January 2014. Diamondback operates about 50% of the net acreage.