Diamondback’s Viper Energy Acquires Sitio Royalties in $4.1 Billion Deal
On June 3, 2023, Viper Energy, a key player in the minerals and royalties sector, announced its acquisition of Sitio Royalties for $4.1 billion in an all-stock transaction. This merger marks a significant consolidation within the minerals and royalties space in the oil and gas industry, forming the largest entity in this sector.
The Changing Landscape of the Permian Basin
The merger comes at a pivotal time for the Permian Basin, which has been the center of intense drilling activity and plays a crucial role in U.S. oil production. The Permian basin, located primarily in West Texas and New Mexico, accounts for nearly 40% of the nation’s crude oil output and a significant portion of natural gas and associated liquids like propane and butane.
Viper Energy, a publicly traded subsidiary of Diamondback Energy based in Midland, Texas, has carved out a niche by owning rights to oil and gas resources without engaging directly in drilling operations. Instead, these companies capitalize on royalties generated by other operators working the wells.
Significance of the Merger
“The combination of Viper and Sitio signifies an important moment for mineral and royalty interests,” stated Diamondback and Viper CEO Kaes Van’t Hof. “This merger creates a leader in terms of size, scale, float, liquidity, and access to investment-grade capital in a highly fragmented minerals industry.”
This merger significantly enhances Viper’s ability to attract capital, thereby positioning it more competitively against larger exploration and production entities that own and operate their own oil and gas wells. The transaction signifies a strategic advancement in both companies’ operations, particularly as the world moves toward an energy transition while still grappling with fossil fuel dependencies.
Financial Aspects of the Acquisition
The $4.1 billion deal involves an assumption of $1.1 billion in Sitio’s debt and reflects a roughly 15% premium over Sitio’s stock value, which surged 12% shortly after the announcement. This transaction is poised to close in the third quarter of 2023. In the wake of the merger announcement, Viper’s stock remained relatively stable, maintaining a market capitalization of around $11.5 billion, while Diamondback’s market value escalated to over $40 billion with a 1% increase on the trading day.
Strategic Expansion Beyond the Permian
The acquisition allows Viper to significantly expand its mineral footprint by adding approximately 25,300 net royalty acres in the Permian Basin, bringing its total to 85,700 net acres. Notably, around 43% of these assets would be operated by Diamondback, providing Viper a competitive advantage through operational synergies.
Moreover, the merger enables Viper to extend its reach beyond the Permian, acquiring an additional 9,000 net royalty acres in other notable gas and oil basins, including those in South Texas, Colorado, and North Dakota. CEO Kaes Van’t Hof acknowledged, “We are still focused on the Permian but may consider selling non-core assets in the future if market conditions allow.”
Industry Context and Implications
According to industry analysts, this merger could ignite further consolidation in the mineral royalty space. Notably, this merger is the largest since Sitio’s formation in 2022, following its merger with Brigham Minerals valued at $4.8 billion. As companies like Diamondback and Viper look to streamline operations, analysts anticipate a heightened interest in merging to optimize resources, synergy, and capital efficiency.
“Mineral rights entail the highest level of security against capital volatility in oil fields, with all benefits from operational success accruing directly to the rights holder without inherent capital risk,” stated Van’t Hof.
The Future of Mineral and Royalty Interests
The minerals sector is vital for maintaining energy stability even as the world explores alternative energies. With escalating investor interest in sustainable and resilient energy sources, companies involved in mineral rights are expected to experience intensified scrutiny and competition as they strive to maintain their attractiveness to capital markets.
As the merger finalizes, experts anticipate that the combined entity will not only enhance operational scale but potentially set a benchmark for future transactions in the minerals sector, including quicker routes to market through enhanced capital access. Looking forward, this deal will be instrumental in shaping the future landscape of the oil and gas industry.
Conclusion
The acquisition of Sitio Royalties by Viper Energy marks a significant evolution in the minerals and royalties sector, reaffirming the importance of scale and capital accessibility in an increasingly competitive market. This strategic move could serve as a precursor for further consolidation, leading to more robust frameworks as energy companies navigate the complexities of fossil fuel and evolving energy landscapes.
Source: fortune