Diamondback Energy Inc. on August 14 agreed to buy Energen Corp. for $9.2 billion. Energen — based in Birmingham, Alabama’s sixth largest public company — has been focused on drilling for oil in the Permian Basin of west Texas. Diamondback, based in Midland, Texas, has been one of Energen’s closest competitors in the Permian Basin — which has become the hottest and most competitive oil play in the U.S., most recently attracting giants Exxon-Mobile and BP LLP.
Here are some of the reasons why Alabama’s Energen was such a valuable prize:
- Energen now maintains a pure play focus on oil exploration.
- Energen has become a specialist in the west Texas fields. Between 2009 and 2012, the company invested around $1 billion in the Permian Basin in West Texas and New Mexico, with at least seven major land acquisitions to stimulate growth. By 2014, the company owned 300,000 acres in the drilling hot spot.
- The Permian Basin is home to the nation’s most plentiful oil reserves. In April, Tortoise Capital Managing Director Rob Thummel told Bloomberg that the Permian Basin could eventually surpass Saudi Arabia’s Ghawar as the largest oil field in the world. According to a June report by the U.S. Energy Information Administration, activity in the basin produces approximately 3.5 million barrels of oil per day. Drilling in the Permian Basin began in the 1920s, but natural pressure started to wane 50 years in. In the 2010s, Energen and other companies turned to fracking and horizontal drilling to maintain output.
- Energen’s performance in the basin has been particularly impressive. While their wells are spread across three sub-basins, Energen has focused largely on the Midland Basin, with the development of the company’s Generation 3 hydraulic fracking wells. In the first quarter of 2018, Energen’s wells produced a total of 92.9 thousand barrels of oil equivalents per day. Adjusted EBITDAX was $240.6 million, 10 percent better than their early expectations.
- Energen stock experienced its most drastic drop in 2016, with stock prices falling from over $60 to $23 that February, corresponding to a drop in oil prices. Noticing Energen’s record, activist investors have taken a keen interest in acquiring the company, and Energen has been resisting invitations to auction for over a year now. Corvex Management LP first broached the subject in May 2017.
- Also in May Corvex officer Keith Meister, protégé of billionaire activist investor Carl Icahn, sold Ichan 2 million shares of Corvex’s Energen stock, which at the time went for $64.84 per share. He also gave Icahn the option to buy 2 million more shares by November. At the time, Corvex claimed about 8.7 percent ownership of Energen with 8.5 million shares.
- By early July, Energen stock was up nearly 19 percent over the same time last year. Just before Independence Day, a new filing showed that Icahn had increased his stake to 7.5 percent. Even as stock continued to climb, Icahn suggested that Energen shares should be valued as high as $100 each. At the time, stock was already trading around $72.50. Prices showed a 57 percent leap from their lowest point of $46.16 last year.
- Diamondback’s offer of $84.95 per Energen share was a premium of 16 percent to Energen’s Tuesday, August 14, close. Energen shares rose 9.3 percent to $79.90 in after-market trading, while Diamondback shares fell 5.5 percent to $126.40.