Diamondback has expanded through a mix of acquisitions and organic growth — it would be fair to say that few, if any, Permian producers (other than maybe Pioneer) have been more consistent, more persistent acquirers in West Texas. As shown in Figure 1, Diamondback (Nasdaq symbol: FANG) bought Permian producers Ajax Resources for $1.2 billion in October 2018; Energen — FANG’s biggest acquisition to date — for $9.2 billion the following month; Guidon Operating for $1.1 billion in February 2021; and QEP Resources for $2.2 billion the month after that. (QEP’s 95,000 net acres and 25 Mboe/d of production in the Bakken also were part of that deal, but Diamondback flipped them to Oasis Petroleum in a $745 million deal that closed last October — see Midnight at the Oasis for more on that.)
On October 11, Diamondback announced its first major acquisition of 2022: a definitive agreement to purchase FireBird Energy LLC for 5.86 million shares of FANG stock and $775 million in cash. (The deal is valued at $1.6 billion.) The cash portion of the transaction is expected to be funded through a combination of cash on hand, borrowings under Diamondback’s credit facility and/or proceeds from a senior notes offering. The deal is expected to close by the end of this year.
So, what does FireBird bring to the table? The E&P has about 68,000 net acres in the Midland Basin, with most of the highly contiguous acreage in eastern Ector County (TX) and the rest in adjoining Midland, Upton and Crane counties (red-shaded area in Figure 2 map). FireBird has been building its holdings and production in the Midland over the past few years. For example, in a December 2021 deal with Chevron, it purchased about 21,000 leasehold acres in the same four-county area. FireBird said at the time that the Chevron deal would allow more than 60 of its drilling locations to be converted from “1-mile locations to 2-mile locations” — a reference to the longer horizontal drilling that could now be done thanks to the newly added, contiguous acreage.
Diamondback said in its announcement that the bolt-on acquisition will provide it with an additional 353 gross (316 net) horizontal drilling locations in primary development targets (the Middle Spraberry, Lower Spraberry, Wolfcamp A and Wolfcamp B formations) with an average lateral length of about 11,400 feet (just over 2 miles). It also said the deal will add more than a decade of inventory at Diamondback’s ongoing development pace, including inventory that competes for capital right away in the E&P’s current development plan. Year-end production from FireBird’s acreage is estimated at 22 Mboe/d, with 17 Mb/d of that crude oil; production from the acreage is expected to grow to 25 Mboe/d (19 Mb/d of it crude oil) in 2023. Diamondback currently holds about 421,000 net acres in the Permian — 268,000 in the Midland Basin and 153,000 in the Delaware. (By our count, the FireBird deal will increase its net acreage to about 489,000.)
[Check out our Permian Fundamentals package for weekly fundamentals analysis reports focusing entirely on the key natural gas and crude oil market drivers in the Permian Basin. Click here for more information and sample reports.]
Notably — and as we’ve seen in a number of recent acquisitions by others — Diamondback said that, upon closing, it plans to reduce the operated rig count on FireBird’s acreage from three to one, and that 2023 production levels from the acreage can be maintained for “multiple years” by running only one rig. That aligns with what has become Diamondback’s mantra, namely, to keep a lid on capital spending, increase production only gradually, optimize free-cash-flow generation, and return at least 75% of FCF to shareholders through base dividends, variable dividends and stock repurchases. (Prior to the third quarter of 2022, the company was committed to returning at least 50% of FCF to shareholders — in the second quarter, it returned 63%.) The E&P noted that it expects the FireBird transaction to be “immediately accretive on all relevant 2023 and 2024 financial metrics, including cash flow per share, free cash flow per share, and (net asset value) per share.” It said that to maintain its strong balance sheet, Diamondback has set a target to sell at least $500 million of non-core assets by the end of next year, with the proceeds earmarked for further debt reduction.
While it would be tempting to say that Diamondback is all about production — and highly efficient. low-cost production at that — we’d be remiss if we neglected to point out that the company in August completed its previously announced plan to acquire all of the remaining publicly held common units in Rattler Midstream LP, a limited partnership that Diamondback had formed to own, operate, develop and acquire crude oil, natural gas and water-related midstream assets in the Permian. (In other words, Rattler is now fully owned by Diamondback.) Among other things, Rattler owns crude-oil and produced-water gathering pipelines and sourced-water delivery pipelines in areas where Diamondback is active, as well as 10% ownership interests in the EPIC Crude and Gray Oak pipelines from the Permian to the Corpus Christi area, a 4% stake in the Wink-to-Webster crude oil pipeline from the Permian to the Houston area, and a 60% non-operated interest in Oryx Midland Oil Gathering (a Midland Basin oil gathering system). Rattler also owns a 25% interest in the WTG joint venture, which owns a majority stake in WTG Midstream, a Midland Basin-focused gas gathering and processing company.
In sum, Diamondback’s acquisition of FireBird — and all its acquisitions over the past few years, for that matter — have given the E&P a prominent place in the top tier of Permian producers, with an enviable inventory of high-graded, oil-focused production assets and strong midstream connections to key downstream markets.
“West Texas in My Eye” was written by Charlie Stout and appears as the first song on The Panhandlers’ debut album, The Panhandlers. The album was released in March 2020 on The Next Waltz Records, a Texas independent label. The band collaborated on writing the songs on the album during a writing session that took place over several days in Marfa, TX. “West Texas in My Eye” is the only song on the album from an outside writer. All four band members are given a verse to sing in the song. “West Texas in My Eye” has been featured prominently in the hit cable television series Yellowstone, which stars Kevin Costner. Personnel on the record were: Josh Abbott, William Clark Green, John Baumann and Cleto Cordero (vocals, instrumentation).
The album The Panhandlers was recorded at The Bunker in Lockhart, TX (30 miles outside Austin) in late 2019 and early 2020. Studio owner and The Next Waltz label owner Bruce Robison produced and engineered the album. The Next Waltz, which describes their label as “an analog record label for the digital age,” recorded the band live to two-inch tape, using analog equipment.
The Panhandlers were formed in Lubbock, TX, by Josh Abbott, William Clark Green, John Baumann and Cleto Cordero in 2019. The band was formerly called Flatland Cavalry but changed its name to The Panhandlers as an homage to Texas music icons The Flatlanders, whose members are Joe Ely, Butch Hancock and Jimmie Dale Gilmore. They have released one studio album. The band tours occasionally, with dates in November in Fort Worth and Odessa, TX.