Diamondback and Endeavor merger continues the trend of bigger, fewer oil companies
Diamondback and Endeavor merger continues the trend of bigger, fewer oil companies
In West Texas, home of the oil- and gas-rich Permian Basin, two big oil-drilling companies said Monday they are merging. Publicly held Diamondback Energy is buying privately held oil driller Endeavor Energy Resources. The new combined company would be worth more than $50 billion.
This news may ring a bell — it may ring many bells — because there were more than $100 billion worth of oil and gas mergers and acquisitions in the Permian Basin 2023. Why the consolidation craze?
Not all oil wells are created equal. Some are easy, like squeezing water from a sponge. Others are closer to squeezing milk from a stone. Oil companies would much rather drill where it’s cheap and easy.
“We know where the good drilling locations are, so there’s been a scramble by companies to secure those,” said Andrew Dittmar, a director at Enverus Intelligence Research.
He said the U.S. has oil and gas for decades of drilling. But the good stuff? The easiest stuff?
“The highest quality rock, you do start to draw that down in the next five or so years,” he said.
So there’s been a rush to gobble up those sites by gobbling up the companies that already own them.
Diamondback Energy, Dittmar estimated, has an easy oil drilling runway of about eight years. Buying Endeavor, he said, would get it about one more. “Which doesn’t sound like a lot, but in the context of the fact it’s hard to make big advancements is an appreciable bump,” he said.
The other thing about oil drilling in the Permian is a lot of it is horizontal. There’s a limit to how far you can reach horizontally — Dittmar said it’s around 4 miles — and a lot of drillers will hit a property line before they ever get that far.
“These guys have a lot of land that’s next to each other, so it’s gonna allow them to drill longer laterals,” said Josh Young, founder of oil and gas investment firm Bison Interests.
But, he said, there are a lot of reasons for the merger and acquisition frenzy that have little to do with oil.
“Executive compensation these days is tied pretty heavily towards share holder returns,” he said.
It’s in executives interest to grow their companies. Shareholders like it too — they get bigger dividends. And the more highly valued the company, the easier it is to buy more companies in the future.
But the mosh pit of mergers is calming down.
“We’re getting to the point where there’s very few remaining buyout targets,” Young said.
In fact, Andrew Dittmar’s company Enveras Intelligence predicts there will be no further megamergers this year.
Stories You Might Like
There’s a lot happening in the world. Through it all, Marketplace is here for you.
You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible.
Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.
