A $13 Billion Oil Giant is Born, Sweeping the Permian!

Wave of Restructuring, Gigantic Deals to Rush to the Permian

As the oil and gas industry enters a new phase, a major merger that will reshape the industry map has been announced in the Permian Basin, a major shale producing region in the United States. Specifically, Diamondback Energy will acquire privately held Endeavor Energy Resources for a massive $26 billion (approximately 3.9 trillion yen). This creates the third largest producer in the Permian and has a significant impact on the industry.

This merger is emblematic of the M&A trend in the energy sector that has been gaining momentum since late 2023, suggesting that companies are increasingly pursuing economies of scale andefficiency in the face of oil and gas price volatility and heightened geopolitical risks. In particular, the stabilization of oil prices andtechnological innovation are driving these large deals.

The acquisition is structured as a combination of cash and company stock paid by Diamondback to Endeavor shareholders; Endeavor has very high-quality assets in the Permian Basin, and this merger will enable Diamondback to significantly expand its production and reserves. This is a long-term growth strategy. This is a critical component of our long-term growth strategy. The deal is also consistent with the recent trend of publicly traded companies acquiring privately held companies. Private companies have the advantage of being able to make decisions quickly and focus on specific strategies, but they have limited access to capital markets and scale. This merger is an attempt to establish a new competitive advantage by combining the strengths of both companies.

This deal is more than just a business combination; it has the potential to have a significant impact on the future of the Permian Basin and, by extension, the global energy supply structure. Why is such a major restructuring taking place now? Behind the scenes, there are a complex set of factors surrounding the oil and gas market. Investors and industry players will need to watch these developments closely. The merger is particularly important as a strategic turning point for fossil fuel companies during the energy transition.

Growth Strategies and Synergies: The Birth of a New Industry Leader

While both Diamondback Energy and Endeavor Energy Resources have primary operations in the Permian Basin, the combination of the two companies’ assets will eliminate operational overlap and reduce costs. The combined assets of the two companies are expected to eliminate operational overlap and realize cost savings. Specifically, the following synergies are expected to be realized in the order of hundreds of millions of dollars per year

• Reduced operating costs through shared infrastructure
• Supply chain optimization and enhanced purchasing power
• Improved production efficiency through the use of a common technology platform
• Reduction of overhead costs through consolidation of administrative functions

This is an important factor that directly translates into increased shareholder value.

The merger is also closely tied to the retirement of Endeavor founder Autry Stephens, known as the “Shale King. He has secured large tracts of land in the Permian Basin and has grown Endeavor into a privately held company. The acquisition of his prime assets into the hands of Diamondback will dramatically strengthen the asset portfolios of both companies, enabling Diamondback to acquire Endeavor’s high-quality drilling interests, secure future production and solidify its foundation for long-term growth. This is the “asset purchase” concept in M&A. This is yet another example of the extreme importance of “asset quality” in M&A.

Furthermore, the new company created by the merger will have a stronger financial position. Its larger size will give it more financing options, and it will be able to secure financing on more favorable terms. This is essential for greater flexibility for future capital expenditures and new mergers and acquisitions. Because the energy market is a volatile and capital-intensive industry, a strong balance sheet will enhance resistance to uncertainty.

This merger will not simply bring two companies together, but will create a new “Permian giant”. As a result, the companies will further strengthen their competitiveness within their industry and establish a competitive advantage over their peers. This could have a positive impact not only on shareholders, but also on employees and the local economy.

Background of Booming Crude Oil and Gas M&A Activity: Strategic Value of the Permian Basin

In recent years, the global energy market has seen an upsurge in M&A activity, particularly in the shale oil and gas sector in North America. Several important factors have contributed to this trend. First is the recovery and stabilization of oil prices. An industry that has suffered from price volatility over the past several years is now enjoying a relatively stable price environment, which is encouraging companies to decide to invest for the future. Second, the industry is responding to inflationary pressures and rising interest rates. Companies are seeking to increase scale to become more cost efficient and to reduce operating expenses by consolidating overlapping operations.

Another factor driving mergers and acquisitions is the growing awareness of ESG (environmental, social, and governance) issues. Large companies are increasingly acquiring companies with prime assets in order to build more efficient production systems with lower environmental impact. This allows for greater consolidation of production and easier compliance with environmental regulations. Above all, the strategic value of the Permian Basin is driving this M&A boom. The Permian Basin is the largest shale producer in the United States, with abundant reserves andrelatively low production costs. Many companies are competing for this “golden egg,” and those with prime drilling interests tend to command high prices.

In fact, a series of very large deals have been announced since late 2023, including ExxonMobil’s acquisition of Pioneer Natural Resources (approximately $60 billion) and Chevron’s acquisition of Hess (approximately $53 billion). These moves clearly demonstrate the “scale is power” philosophy in the energy industry. By securing production and increasing their influence in the market, major companies are seeking to improve their ability to negotiate prices and supply chain stability.

This booming M&A activity is also important from an energy security perspective. As geopolitical risks increase globally, ensuring stable domestic energy supply capacity has become a priority for governments. Consolidation of the U.S. shale industry will play a part.

Post-Merger Outlook and Market Impact: Path to Sustainable Growth

The merger between Diamondback and Endeavor will not only bring together two companies, but will have a profound impact on the future of the Permian Basin and, by extension, the global energy market. First, the new company will further strengthen its leadership position in the Permian Basin due to its unparalleled scale and efficiency. This could further increase consolidation pressure through mergers and acquisitions for other smaller producers. Industry-wide restructuring may accelerate, moving toward a market dominated by a smaller number of larger players.

The main focus for investors will be the performance of the new merged company. The key will be whether the synergies from the merger will be realized as planned and whether a sustainable growth strategy can be developed under the new management structure. In particular, the question will be how fossil fuel companies can reconcile ESG goals with economic benefits in the midst of the energy transition. New companies will be required to enhance their efforts to improve production efficiency and reduce emissions through technological innovation.

The deal will also have a significant impact on private equity (PE) investors, as privately held quality assets such as Endeavor have been attractive investment targets for PE funds, but this acquisition will reduce the number of high quality private assets available on the market. This may have an impact on future PE investment strategies. At the same time, for other shale companies in which PE has invested, this may encourage further deals as it provides a concrete M&A option as an “exit strategy”.

In the long run, this merger could help stabilize energy supplies and reduce costs. At the same time, however, the increased dominance of the market by a few large players will raise challenges , such asa changing competitive environment and concentration of risk in certain companies. We will keep a close eye on how the new company responds to these challenges and grows to become an important player in global energy supply.