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Diamondback (FANG) Declares Strategic Sale of WTG Midstream

Diamondback Energy, Inc. FANG has declared the sale of WTG Midstream Holdings LLC to Energy Transfer LP ET. This strategic move will yield a total pre-tax consideration of approximately $375 million for Diamondback. The transaction will consist of a mix of cash and ET common units. The deal will be finalized in the third quarter of 2024.

Significance of the Sale

Financial Impact: This sale represents a significant financial milestone for FANG. Through its subsidiary, Rattler Midstream LP, FANG has owned a 25% stake in Remuda Midstream Holdings LLC (WTG Midstream) since October 2021. The sale of WTG Midstream Holdings LLC represents an approximate 3.5x on invested capital for FANG.

Debt Reduction Strategy: Proceeds from this transaction will be strategically used to reduce debt associated with the pending Endeavor Energy Resources, L.P. merger. This approach highlights FANG's commitment to financial stability and prudent debt management.

Strategic Partnership and Operational Transition

Expanding Relationships: Travis Stice, chairman and chief executive officer of Diamondback, emphasized that the partnership has generated an outsized economic return and highlighted the continued support WTG’s gas gathering and processing system provides to Diamondback’s substantial activity on its dedicated acreage.

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Operational Synergies: The sale will enable Diamondback to leverage operational synergies with Energy Transfer, facilitating a seamless transition that supports ongoing gas gathering and processing activities on FANG’s dedicated acreage. This continuity is crucial for maintaining Diamondback's substantial operational footprint and ensuring sustained productivity.

Market Context and Future Prospects

Industry Dynamics: The midstream sector, encompassing the gathering, processing and transportation of oil and gas, remains a critical component of the energy value chain. The strategic sale of WTG Midstream Holdings LLC aligns with broader industry trends as companies are optimizing portfolios, focusing on core assets and strengthening financial positions through strategic divestitures and mergers.

Competitive Positioning: By divesting a significant midstream asset, FANG looks to enhance its competitive positioning within the industry. The proceeds will not only reduce debt but also potentially fund growth initiatives and operational expansions. This proactive financial strategy positions FANG favorably in a competitive and evolving market landscape.

Detailed Analysis of Transaction Components

Cash and Equity Consideration: The transaction involves a mix of cash and ET common units. This hybrid consideration structure provides Diamondback with immediate liquidity while maintaining an equity interest in Energy Transfer, potentially benefiting from future appreciation and dividend income from ET common units.

Closing Conditions and Adjustments: As with any major transaction, the sale is subject to customary closing conditions and adjustments. These typically include regulatory approvals, due diligence processes and other standard closing prerequisites that ensure the transaction's legitimacy and alignment with industry regulations.

Conclusion

The sale of WTG Midstream Holdings LLC to Energy Transfer is a key transaction for FANG, offering substantial financial returns and strategic advantages. The transaction will enhance FANG's economic stability, support debt reduction and strengthen operational synergies with a key industry player. As the deal progresses toward an anticipated close in the third quarter of 2024, stakeholders can look forward to the continued execution of FANG’s strategic vision and operational excellence.

Zacks Rank and Key Picks

Currently, FANG and ET carry a Zacks Rank #3 (Hold) each.

Investors interested in the energy sector might look at some better-ranked stocks like Archrock, Inc. AROC and SM Energy Company SM, each sporting a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Archrock is valued at $3.09 billion. The company currently pays a dividend of 66 cents per share, or 3.34%, on an annual basis.

AROC, together with its subsidiaries, works as an energy infrastructure company in the United States. The company operates under two segments — Contract Operations and Aftermarket Services.

Denver, CO-based SM Energy is valued at $5.53 billion. The company currently pays a dividend of 72 cents per share, or 1.5%, on an annual basis.

SM, an independent energy company, engages in the acquisition, exploration, development and production of oil, gas and natural gas liquids in the state of Texas.

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SM Energy Company (SM) : Free Stock Analysis Report

Energy Transfer LP (ET) : Free Stock Analysis Report

Diamondback Energy, Inc. (FANG) : Free Stock Analysis Report

Archrock, Inc. (AROC) : Free Stock Analysis Report

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