Viper Energy fortifies Permian presence with $4.1 billion Sitio deal

Viper Energy VNOM will buy Sitio Royalties STR in an all-stock deal valued at about $4.1 billion, the companies said on Tuesday, expanding the Diamondback Energy unit's presence across oil-rich shale regions such as the Permian Basin.

The deal underscores the Permian's attractiveness among buyers even as dealmaking in the U.S. oil patch slows down due to volatile oil prices and market uncertainty.

For Diamondback FANG, it is the second major deal in the region this year after agreeing in February to buy certain units of EnCap Investments-backed energy producer Double Eagle for $4.08 billion.

Diamondback operates Viper to primarily acquire oil and natural gas properties in North America.

Piper Sandler analysts saw the deal as a positive development for Viper as it "expands the size and scale of what was already the largest publicly traded oil & gas mineral company".

Sitio's shares rose 11.4% to $19.30 in morning trade, hovering around the implied offer price of $19.41 per share.

Viper Energy shares were up 0.9% at $40.31, while Diamondback stock was up nearly 3% at $141.6.

The transaction, which includes Sitio's net debt of about $1.1 billion as of March 31, is expected to close in the third quarter.

The Sitio deal will increase Viper's net royalty acreage in the Permian by roughly 42% and fourth-quarter pro-forma total oil production by about 38%.

It will also lower Viper's pro-forma base dividend break-even by about $2 per barrel to below $20 WTI.

The fall in oil prices this year has raised affordability concerns for U.S. producers and cast fresh scrutiny on how they plan to maintain shareholder returns.

Sitio also has roughly 9,000 acres distributed across the other prominent shale basins such as DJ, Eagle Ford and Williston.

Viper also announced a near-term net debt target of $1.5 billion, which it expects to achieve through free cash flow generation and potentially non-core asset sales.

"We can be patient monetizing these assets at higher commodity prices eventually down the line," a company executive said.

Diamondback will own about 41% of pro-forma Viper's outstanding shares after close of the Sitio deal, compared to about 92% when Viper went public in 2014.