8-K: Diamondback Energy Files Historical Financials for Endeavor Parent Ahead of Merger

Diamondback Energy, Inc. has filed historical financial information for Endeavor Parent, LLC, including audited financial statements and management's discussion and analysis, as part of its acquisition process.

Summary

• Diamondback Energy, Inc. filed a Form 8-K including historical financial statements for Endeavor Parent, LLC, which is being acquired by Diamondback.
• The filing includes Endeavor's audited consolidated financial statements for the years ended December 31, 2023, 2022, and 2021, along with unaudited supplemental information on oil and natural gas producing activities.
• Endeavor's management discussion and analysis of financial condition and results of operations is also included in the filing.
• Endeavor's total proved reserves had a PV-10 of approximately $21 billion as of December 31, 2023, with proved developed reserves at approximately $14 billion.
• In 2023, Endeavor generated $6.187 billion in total revenues, $3.984 billion in net income, and $5.044 billion in Adjusted EBITDA, with average daily production of 337.7 MBOE.
• Capital expenditures for 2023 totaled $3.315 billion, and the company anticipates spending between $2.5 billion and $2.6 billion in 2024.
• Endeavor's tax status changed from an S-Corporation to a C-Corporation effective January 1, 2024, which will result in a one-time deferred tax charge between $1.5 billion and $1.7 billion.
• A merger agreement with Diamondback Energy was entered into on February 11, 2024, with the merger expected to close in the fourth quarter of 2024.

Sentiment

Score: 5

Explanation: The document presents a mixed picture. While production volumes and reserves are strong, the decrease in net income and EBITDA, along with the significant deferred tax liability, temper the positive aspects. The upcoming merger adds uncertainty, making the overall sentiment neutral.

Positives

• Endeavor's proved developed reserves increased by 9% year-over-year to 954 MMBOE.
• The company's daily production volumes increased by 21% in 2023 compared to 2022.
• Endeavor has a multi-decade inventory of drilling locations in the Midland Basin.
• The company has a strong liquidity profile with $2.188 billion in cash and available credit as of December 31, 2023.
• Endeavor's management is focused on enhancing cash flows and return on capital through operational efficiencies.

Negatives

• Endeavor's net income decreased by 16% in 2023 compared to 2022, primarily due to lower realized oil, natural gas, and NGL prices.
• Adjusted EBITDA decreased by 6% in 2023 compared to 2022.
• Cash flow provided by operating activities decreased by 5% in 2023 compared to 2022.
• Lease operating expenses increased by 21% in 2023 compared to 2022.
• The company will incur a significant one-time deferred tax charge between $1.5 billion and $1.7 billion due to the change in tax status.

Risks

• Hydrocarbon price volatility poses a significant risk to Endeavor's business, cash flows, and results of operations.
• Regional price differentials may impact near-term financial results due to potential constraints on delivery to consuming markets.
• Inflationary pressures, supply chain disruptions, and geopolitical events may continue to impact pricing and costs.
• A potential economic downturn or recession could negatively affect demand and prices.
• Future borrowing base redeterminations may result in lower borrowing capacity and require repayment of deficiencies.

Future Outlook

Endeavor anticipates that total capital expenditures for 2024 will range from $2.5 billion to $2.6 billion and expects to fund its 2024 capital budget predominantly with cash flows from operations, cash on hand, and borrowings under its revolving credit facility. The merger with Diamondback is expected to close in the fourth quarter of 2024.

Management Comments

• Endeavor believes the Spraberry Trend represents one of the premier oil, natural gas and NGL development opportunities in North America.
• Endeavor currently believes that it will be able to fund its 2024 capital budget predominantly with cash flows from operations, cash on hand and, if needed, borrowings under its revolving credit facility.
• Endeavor will endeavor to maintain a conservative financial position to allow the expansion of its drilling and development activities reflective of current hydrocarbon prices to maximize the present value of its resource potential.

Industry Context

This announcement is significant within the oil and gas industry as it provides detailed financial information about Endeavor, a major player in the Permian Basin, ahead of its acquisition by Diamondback Energy. The merger is expected to create a larger, more diversified company with a stronger position in the region. The filing also highlights the ongoing volatility in the oil and gas market and the importance of managing costs and maintaining a strong balance sheet.

Comparison to Industry Standards

• Endeavor's production growth of 21% year-over-year is strong compared to many other independent oil and gas producers, though specific comparisons would require a peer group analysis.
• The PV-10 of $21 billion for total proved reserves is a substantial figure, indicating a significant asset base, but its relative value depends on the specific characteristics of the reserves and the discount rate used.
• The planned capital expenditure range of $2.5 to $2.6 billion for 2024 is a significant investment, but its efficiency will depend on the company's ability to execute its drilling program and manage costs.
• The change in tax status from S-Corp to C-Corp is a significant event that will impact Endeavor's future financial reporting and tax liabilities, and is not a common event for companies of this size.
• The merger with Diamondback is a major transaction that will reshape the competitive landscape in the Permian Basin, and its success will depend on the integration of the two companies and the realization of synergies.

Related Party Transactions

• The Company either receives revenues or is billed for services provided by entities wholly or partially owned Autry C. Stephens, the sole member of Endeavor Manager, the sole manager of Endeavor Parent.
• Oasis Transportation and Marketing Corporation, an entity in which Mr. Stephens is a majority owner, purchases some of our crude oil.
• Advanced Stimulation Technologies, Inc., (AST) an entity wholly owned and controlled by Mr. Stephens, provides well fracturing, stimulation and cementing services to us at prices agreed upon by the parties from time to time, all in accordance with the terms of a written contract.
• ACME Energy Services, Inc. (ACME), an entity wholly owned by Mr. Stephens, has provided or provides oilfield services to us.

Stakeholder Impact

• Shareholders of Diamondback Energy will be impacted by the acquisition of Endeavor, including the issuance of new shares and the financial performance of the combined entity.
• Endeavor's employees may experience changes due to the merger, including potential restructuring or integration of operations.
• Customers and suppliers of both companies may see changes in their relationships as the companies integrate.
• Creditors of Endeavor will be impacted by the merger, including the repayment of debt and the terms of the new debt structure.

Next Steps

• The merger between Endeavor and Diamondback is expected to close in the fourth quarter of 2024.
• Endeavor will continue to execute its 2024 capital program, focusing on the Midland Basin.
• The company will monitor hydrocarbon prices and market conditions to adapt to changes in the industry.

Key Dates

Keywords

Endeavor Energy Resources, Diamondback Energy, Merger, Oil and Gas, Permian Basin, Financial Statements, Reserves, Production, EBITDA, Capital Expenditures