425: Viper Energy to Acquire Sitio Royalties in $4.1 Billion All-Equity Deal, Creating Permian Basin Royalty Leader

Viper Energy, a subsidiary of Diamondback Energy, announced its acquisition of Sitio Royalties in an all-equity transaction valued at approximately $4.1 billion, aiming to create a leading North American mineral and royalty company with enhanced scale and financial accretion.

Summary

• Viper Energy, Inc. (Viper) will acquire Sitio Royalties Corp. (Sitio) in an all-equity transaction valued at approximately $4.1 billion, including Sitio's net debt of approximately $1.1 billion as of March 31, 2025.
• The transaction involves the merger of Viper and Sitio into a new holding company, New Cobra Pubco, Inc. (New Parent), with Viper's operating subsidiary, Viper Opco, absorbing Sitio Opco.
• Upon consummation, former Viper and Sitio stockholders will own approximately 80% and 20%, respectively, of New Parent on a fully diluted basis.
• Sitio stockholders will receive 0.4855 shares of New Parent Class A common stock for each Sitio Class A common stock, representing an implied value of $19.41 per share based on Viper's June 2, 2025 closing price.
• The Boards of Directors of both companies unanimously approved the transaction, and Diamondback, Viper's majority stockholder, has approved it by written consent.
• Stockholders holding approximately 48% of Sitio's outstanding voting power, including Kimmeridge, have agreed to vote in favor of the transaction.
• The transaction is subject to customary regulatory approvals and is expected to close in the third quarter of 2025.
• Viper's Board of Directors also approved a 10% increase to its base dividend, raising it to $1.32 per share annually ($0.33 per share quarterly).

Sentiment

Score: 9

Explanation: The document conveys a highly positive sentiment, emphasizing significant strategic benefits, financial accretion, cost synergies, increased dividend, and enhanced market positioning for the combined entity. Management comments are enthusiastic, highlighting the creation of an industry leader with strong financial metrics and future growth prospects.

Positives

• The merger adds substantial scale and inventory depth, supporting a durable production profile and free cash flow growth for the pro forma Viper over the next decade.
• The transaction is expected to be approximately 8-10% accretive to cash available for distribution per Class A share immediately upon closing.
• The combined entity's base dividend breakeven is expected to lower by approximately $2 per barrel to less than $20 WTI.
• Significant annual synergies in excess of $50 million are estimated, primarily from general and administrative and cost of capital savings.
• Pro forma Viper is expected to maintain its Investment Grade status, with pro forma leverage of approximately 1.2x at closing (at strip pricing) and a near-term net debt target of $1.5 billion (less than 1.0x leverage at $60 WTI).
• Diamondback Energy is expected to own approximately 41% of pro forma Viper's outstanding common stock and will continue to drive meaningful long-term oil production growth from the combined company's acreage.
• The combined company will have approximately 85,700 net royalty acres in the Permian Basin, with approximately 43% operated by Diamondback.
• Pro forma Viper will own an average 1.8% net royalty interest in approximately 33,300 gross producing horizontal wells (approximately 608 net wells).
• The combined entity will have approximately 75.4 existing net DUCs (Drilled Uncompleted wells) and permits with an average lateral length of approximately 10,800 feet, with Diamondback operating 41.1 of these at an average lateral length of approximately 12,400 feet.
• Estimated Q4 2025 average production for the combined entity is projected to be 64-68 mbo/d (122-130 mboe/d), with full year 2026 average production expected to increase by a mid-single digit percentage from these levels.

Risks

• Risk associated with Sitio's ability to obtain the required approvals from its stockholders to consummate the Mergers.
• Risks related to the timing of the closing of the Mergers, including the possibility that conditions to the Mergers are not satisfied on a timely basis or at all, or the failure of the Mergers to close for any other reason or on the anticipated terms, including the anticipated tax treatment.
• The risk that any required regulatory approval, consent, or authorization for the Mergers is not obtained or is obtained subject to unanticipated conditions.
• Challenges in the post-combination company's ability to successfully integrate Sitio's and Viper's businesses and technologies.
• The risk that the expected benefits and synergies of the Mergers may not be fully achieved in a timely manner, or at all.
• The risk that Sitio or Viper will not, or that following the Mergers, the post-combination company will not, be able to retain and hire key personnel.
• Unanticipated difficulties or expenditures relating to the Mergers, and potential negative responses from business partners and retention issues as a result of the announcement and pendency of the Mergers.
• Viper's ability to finance the combined company on acceptable terms or at all.
• Uncertainty as to the long-term value of the post-combination company's common stock.
• Diversion of Sitio's and Viper's management time on transaction-related matters.
• General risks described in Viper's and Sitio's periodic filings with the SEC, including their Annual Reports on Form 10-K for the year ended December 31, 2024, and subsequent Forms 10-Q and 8-K.
• The competitive and rapidly changing environment in which Viper and Sitio conduct their businesses, and the emergence of new risks from time to time.

Future Outlook

The combined Viper-Sitio entity, operating as 'pro forma Viper,' is positioned to become a leading North American public mineral and royalty company with significantly enhanced size, scale, and liquidity. It expects to achieve durable production profiles, free cash flow growth over the next decade, and maintain an Investment Grade status. Management anticipates substantial financial accretion, lower dividend breakeven points, and significant annual synergies, enabling higher cash returns to shareholders and strong positioning for future M&A opportunities. The continued relationship with Diamondback Energy is expected to drive long-term oil production growth from the combined company's acreage.

Management Comments

• Kaes Vant Hof, CEO of Viper, stated, "This combination creates a leader in size, scale, float, liquidity and access to investment grade capital in the highly fragmented minerals industry. Pro forma Viper is now clearly a must-own public mineral and royalty company in North America, with attractive size and scale in the Permian Basin. This transaction positions Viper to compete for capital with mid and large cap North American E&Ps; except with higher margins, minimal operating costs, and the lowest dividend breakeven in the space."
• Mr. Vant Hof also emphasized, "While this transaction will reduce Diamondbacks ownership in pro forma Viper to 41%, it does not reduce the significance of the relationship between Diamondback and Viper. The Diamondback drillbit remains Vipers biggest competitive advantage and the most visible source of long-term production growth at Viper."
• Chris Conoscenti, CEO of Sitio, commented, "We are excited to announce the combination of two leading minerals companies with a shared strategic vision of integrating the highest quality assets to create a truly differentiated investment opportunity for shareholders. This transaction provides Sitios shareholders with exposure to an entity with significantly greater size, future development visibility, and all of the benefits of the economies of scale unique to the minerals business – higher margins, lower cost of capital, strong positioning for future M&A opportunities, and the ability to return more capital to shareholders."
• Noam Lockshin, Chairman of the Sitio Board of Directors, added, "By adding Sitios coverage of the Delaware Basin to Vipers position in the Midland Basin, the combined company will be well positioned in the Permian for years to come."

Industry Context

This merger signifies a significant consolidation within the highly fragmented U.S. oil and gas mineral and royalty interest sector, particularly in the Permian Basin. The combined entity aims to leverage increased scale and operational overlap to enhance efficiency and competitiveness, positioning itself to compete for capital with larger North American exploration and production (E&P) companies while maintaining a low-cost, high-margin business model characteristic of royalty companies. The continued strong relationship with Diamondback Energy, a major Permian operator, provides a distinct competitive advantage in terms of production growth visibility.

Comparison to Industry Standards

• The pro forma Viper is positioned to be a leader in size, scale, float, liquidity, and access to investment-grade capital within the fragmented minerals industry.
• Management asserts that the combined entity will have the 'lowest dividend breakeven in the space' at less than $20 WTI, which is a strong competitive advantage compared to other mineral and royalty companies.
• The transaction is expected to enable the combined company to 'compete for capital with mid and large cap North American E&Ps,' suggesting a competitive financial profile relative to a broader set of energy companies, but with higher margins and minimal operating costs inherent to the royalty business model.
• The significant overlap (approximately 50%) with existing Viper gross producing horizontal wells in the Permian Basin, combined with Diamondback Energy's continued role as a major operator (expected to own 41% of pro forma Viper and operate 43% of its Permian net royalty acres), provides a unique and strong operational alignment not typically seen across the broader industry.

Stakeholder Impact

• Shareholders of Sitio Royalties Corp. will receive shares in the new combined entity, New Cobra Pubco, Inc., providing them with exposure to a larger, more diversified mineral and royalty company with enhanced scale and liquidity.
• Shareholders of Viper Energy, Inc. will maintain their ownership in the combined entity, benefiting from the expected financial accretion, synergies, and increased dividend.
• Diamondback Energy, Inc., as Viper's majority stockholder and expected to own approximately 41% of the pro forma entity, will continue to benefit from the combined company's performance and its role in driving production growth.
• Employees of both companies may face integration challenges and potential retention risks, as mentioned in the forward-looking statements.
• Business partners may experience changes due to the merger, and their response and retention are identified as potential risks.

Next Steps

• New Parent will file a registration statement on Form S-4 with the SEC, which will include a proxy statement for Sitio, an information statement for Viper, and a prospectus for New Parent.
• The Mergers will be submitted to Sitio's stockholders for their consideration and approval.
• The transaction is subject to customary regulatory approvals.
• The Mergers are expected to close in the third quarter of 2025.
• Viper will host a conference call and webcast for investors and analysts on June 3, 2025, at 7:00 a.m. CT to discuss the transaction.

Key Dates

Recommendation

Keywords

Merger, Acquisition, Oil and Gas, Royalties, Minerals, Permian Basin, Viper Energy, Sitio Royalties, Diamondback Energy, Energy Sector, All-Equity Transaction, Dividend Increase, Corporate Governance, SEC Filing