[Editor's note: This story has been updated from a previous version posted at 7:51 a.m. CT Dec. 21.]

U.S. shale producer Diamondback Energy said on Dec. 21 it would buy rival QEP Resources Inc. in an all-stock deal valued at around $2.2 billion.

Diamondback said the deal will include $1.6 billion of QEP’s debt and implies a marginal premium to the stock's Friday close of $2.31 on the NYSE.

Through the transaction, Diamondback will add material Tier-1 Midland Basin inventory that competes for capital immediately to its portfolio. It will lower the company’s 2021 reinvestment ratio and enhance its ability to generate free cash flow, de-lever and return capital to stockholders.

The deal will also provide tangible annual synergies of at least $60 to $80 million comprised of G&A savings; cost of capital and interest expense savings; improved capital efficiency from high-graded development; physical adjacencies to increase lateral lengths; and significant adjacent Permian midstream assets.

According to the deal’s highlights, a significant majority of Diamondback’s capital will now be allocated to the Northern Midland Basin.

In addition, acquiring QEP will deliver approximately 49,000 net acres in the Midland Basin primarily held by production allowing for capital efficient development, Q3 2020 average production of 48.3 MBO/d (76.7 MBOE/d); Q3 2020 average Permian production of 30.5 MBO/d (47.6 MBOE/d), and 48 current DUCs. The DUC balance is expected to be worked down along with Diamondback’s DUC balance in 2021, lowering 2021 reinvestment ratio.

QEP’s Williston assets will be considered non-core and will be used to harvest cash flow or they will be divested, pending market conditions, with potential sale proceeds to be used towards debt reduction.

Enverus Senior M&A Analyst Andrew Dittmar described the deals—QEP Resources for $2.15 billion and Blackstone-sponsored Guidon Energy for $862 million—as a significant enhancement to Diamondback’s core Permian position.

“The focus of the QEP acquisition is their core acreage in the Midland Basin, supported by a significant midstream asset base. The midstream portion likely creates additional dropdown opportunities for Diamondback to its midstream affiliate Rattler. Diamondback is considering QEP’s Bakken position non-core, with a potential divestment on the horizon, pending market conditions allowing for a reasonable valuation.”

The acquisition of QEP by Diamondback, he added, fits firmly within the mold established for 2020 public E&P consolidation. The deal is structured with no premium and all-stock consideration. It focuses on immediately boosting cash flow to fund shareholder capital returns and debt reduction. Diamondback also expects further support for cash flow through anticipated synergies of $60-80 million per year.

The buying of Blackstone-sponsored Guidon Energy, similar to acquisitions of private equity-backed companies in prior years, is a mix of cash and stock with the value now tilted a bit more towards stock, according to Dittmar. In addition, he said asset valuations have been reworked with a higher percentage of the total value targeting PDP and less being paid for undeveloped land in a lower rig rate environment.

The pending QEP acquisition, together with the previously announced pending acquisition of assets from Guidon Operating LLC, will bring Diamondback’s total leasehold interests to over 276,000 net surface acres in the Midland Basin (429,000 Midland and Delaware Basin net acres).

“The acquisition of QEP also checks every box of Diamondback’s corporate development strategy,” Travis Stice, CEO of Diamondback, said. “The business combination with QEP and the Guidon transaction are accretive on all relevant 2021 financial metrics including free cash flow per share, cash flow per share and leverage, even before accounting for synergies. Most importantly, the addition of this Tier-1 resource competes for capital right away in Diamondback’s current portfolio, and we will now be able to allocate most of our capital to the high-returning Midland Basin for the foreseeable future.”

He added: “Pro forma for these transactions, Diamondback is also expected to maintain its Investment Grade status, ensuring access to capital. As stated in past public commentary, Diamondback does not need to participate in industry consolidation to simply get bigger. We participate in corporate development opportunities that we firmly believe will increase the long-term value of our stockholders’ investment.”

Under the terms of the definitive merger agreement, stockholders of QEP will receive 0.05 shares of Diamondback common stock in exchange for each share of QEP common stock, representing an implied value to each QEP stockholder of $2.29 per share based on the closing price of Diamondback common stock on December 18, 2020.

“Combined, the two acquisitions significantly enhance Diamondback’s core Midland Basin position and are expected to be immediately competitive for capital in its portfolio,” Dittmar said. “Both positions are contiguous with existing Diamondback leasehold across its core operating fairway in the Northern Midland Basin. Commentary from CEO Travis Stice seems to indicate the company will be prioritizing capital allocations to its Midland Basin asset base, relative to its acreage in the Delaware Basin.”

During recent years, Concho, Pioneer, and Diamondback have often been grouped together as the most significant public pure-plays in the Permian in terms of scale, fiscal health, and operational achievements, Dittmar said. Now, all have been major participants in 2020’s hyperactive upstream corporate M&A market with one—Concho—choosing to exit while both Pioneer and Diamondback have played roles as consolidators.

Dittmar said the remaining private equity-backed E&Ps in the Permian are on the table as potential targets.

“Many of these companies were built with plans for an eventually exit via sale to a public E&P, plans that have been challenged by the current market," he said. "In order to get a deal across the finish line, would-be sellers may have to temper expectations on the ratio of cash received versus equity, and the overall valuation on their assets. In these situations, finding a buyer like Diamondback whose equity the sponsor is comfortable holding is likely critical.”

Upon closing the transaction and excluding the impact of shares to be issued in the previously announced acquisition of assets from Guidon, Diamondback stockholders will own approximately 92.8% of the combined company, and QEP stockholders will own approximately 7.2%.

The transaction has been unanimously approved by the Boards of Directors of Diamondback and QEP and is expected to be completed in the first quarter or early in the second quarter of 2021, subject to the approval of QEP stockholders, the satisfaction of certain regulatory approvals and other customary closing conditions.