Global private equity firms raised billions of dollars over the last decade to invest in energy and infrastructure projects and today they are sitting on more dollars that they have good deals to invest. Thus, investment firms are relying on established oil and gas operators to deploy large amounts of capital so they can collect those coveted management and performance fees, even when firms are competing with one another for those deals, squeezing out profits for investors.
The latest case is the joint venture between Diamondback Energy ( FANG) and the Carlyle Group ( CG) , which runs a fund targeting investments in the oil and gas sector. Under the deal, Carlyle and Diamondback will jointly invest $620 million to develop FANG assets in the San Pedro area of Pecos County, Texas within the Southern Delaware basin. The Carlyle fund will invest up to 85% for the development program over five years and its interests will revert back to Diamondback after certain performance milestones are met.
Diamondback is one of the large, pure-players in the Permian Basin with over 230,000 net acres in the basin and 112 thousand barrels of oil equivalent a day (BOE/d) of production, which is predominantly oil (73%). Last August, FANG agreed to buy shale rival Energen Corp. ( EGN) in an all-stock deal valued at $9.2 billion to get an expanded footprint in the Permian, the largest and fastest growing oil field in the United States.
FANG is up 32% over the last 12 months even after a 10% share drop in early August after it announced its mega $9.2 billion deal to buy Energen. The company is among the most profitable in its peer group with more than a 16% return on average capital employed (ROACE). FANG has grown EBITDA/share over 800% since its IPO in 2012, while oil prices are down 23% over same period. We expect this growth trend to continue as the company deploys capital to develop assets.
Diamonback has been strategically working to further boost its presence in the region while many producers like EOG Resources ( EOG) have announced reducing their spending levels in the Permian and shifting their focus to other shale plays. Over the last 45 days, Diamondback announced two major acquisitions to boost its Permian footprint: a private-equity backed Permian player Ajax Resources LLC for $900 million in cash and $300 million in stock, adding around 25,493 net leasehold acres to its portfolio, and the Energen deal.
While the lack of takeaway capacity in the prolific Permian play could hold down growth prospects for the Permian Basin in the near future, Diamondback doesn't seem to be worried about this issue. The company has firm transportation commitments to ship the majority of its gross production of crude oil to the Gulf Coast markets at fixed prices for the remainder of 2018 and 2019. For 2020 and beyond, FANG has 225,000 barrels a day of gross firm transportation to Gulf Coast markets. These commitments are positive signs for production expansion. Diamondback believes that once the pipeline issues get sorted over the next 18 months, the Permian Basin will offer handsome rewards to the company.
We expect other private equity firms like KKR & Co. Inc. ( KKR) and Apollo Global Management ( APO) to carry on similar drilling ventures as asset managers continue to seek avenues to deploy capital. Stay tuned for more on who would be the potential targets.
