Permian Basin pure-play Diamondback Energy Inc. has clinched a stock-and-cash agreement estimated at $1.55 billion to acquire the West Texas assets of Lario Permian LLC.
In exchange for 4.18 million shares of common stock and $850 million cash, Diamondback is set to take over the Lario Oil & Gas Co. subsidiary’s Permian Midland sub-basin assets by the end of January.
“Lario is an attractive bolt-on to our existing Martin County position, home to some of the best rock in the Permian Basin,” CEO Travis Stice said. “This is a deal that checks all the boxes Diamondback looks for in an acquisition, as it brings over 150 gross locations in the core of the Northern Midland Basin and also provides immediate accretion to all relevant financial metrics, enhancing Diamondback’s overall value proposition to our stockholders.”
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Combined with the pending acquisition of privately held FireBird Energy LLC, Diamondback’s Midland footprint will be extended another 83,000 net acres, Stice said.
The bolt-on has around 500 drilling opportunities that would “compete for capital with our current development plan…”
The takeover also would add around 50,000 boe/d to Diamondback’s 2023 production profile, Stice said. Around 15,000 net acres are in the “core” of the northern Midland sub-basin.
The FireBird bolt-on added around 68,000 net acres on the western side of the Midland sub-basin, adjacent to Diamondback operations.
Diamondback plans to cut the Lario Permian operated rig count to one from two after the transaction is completed.
Midland Topping Delaware
Earlier this month, the Midland, TX-based independent said 3Q2022 production averaged 390,600 boe/d.
In the Midland, Diamondback drilled 48 wells and completed 42. In the twin Delaware sub-basin, 11 wells were drilled and 22 completed. Stice discussed the results, and how the company has improved its drilling techniques, during a conference call with analysts.
During the quarterly conference call, CFO Kaes Van’t Hof said the company’s focus has turned more to the Midland. Diamondback also plans to continue to co-develop some wells after encountering well-on-well interference, i.e. parent-child issues, in 2019.
“Generally, the teams have done a really good job on not only spacing within each zone, but the intra-zonal spacing given that these zones ‘talk’ to each other,” Van’t Hof said. “The result is better overall assets here over the last couple of years…
“I think we’re going to keep co-developing. And in fact, in some ways, we’ll end up doing some larger pads than we even have prior, given the amount of virgin rock we have… “
In addition, the company’s lower well costs than some peers “are certainly the biggest advantage we have…and that’s a cultural thing from top to bottom,” the CFO said.
Stice said since the parent-child well issues were found in 2019, “we began co-developing our primary targets. Since then, we’ve learned how to optimize our development patterns and spacing, and as a result, are seeing material improvement in well productivity over the past 36 months.
“In fact, our well performance this year is back at 2019 levels, when we were primarily targeting one-off wells in our zones…” While the wells had “great performance and economics, and the potential to withstand significant components of our inventory,” the issues led to “material parent-child concerns down the line.”
Growing Lower 48 Production? Only ‘Muted’
Asked about how exploration and production companies were responding to the Biden administration’s call to step up output, Stice said he expects to see “more of a muted production growth from U.S. shale going forward. That said, out here in the Permian, I think we’re still continuing to hit production records every month, somewhere close to 5.3 million-5.5 million b/d.
“But that’s going to be a challenge to continue to grow that into the future. Do we have the assets out here? Yes, we do. But some of those other topical constraints,” such as pipelines filling quickly, “are going to be impediments to efficient growth.”
Stice assumes that commodity prices will remain hgh, but while some operators are trying to grow, they may trail on efficiencies. “So those also create headwinds as well for shareholders.”
A lack of natural gas infrastructure may cause egress issues from the Permian too, Stice said.
“Certainly, it’s going to be tight…I think gas takeaway is going to be talked about most of next year, probably well into 2024 as well until we get some of the major pipes on.”
To meet those takeaway challenges, Diamondback has been undoing some “opportunistic hedging, particularly on the Waha side. And we’ve committed to some of these pipes that will help make sure we get gas not only that doesn’t go to Waha, but goes directly to the Gulf Coast.”
About two-thirds of Diamondback’s gas goes to Waha, while the other one-third gets Gulf Coast exposure on the Whistler Pipeline, Van’t Kof said. “As you think about 2024, we think there’s going to be pockets of weakness in 2024, certainly easing in the back half of the year when the big pipe Matterhorn Express comes on,” the CFO said. “But it’s going to be tight from now until then, because some of these expansions…I think they’re going to be full right away.”
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