The Birmingham, Alabama-based company has entered final-stage negotiations to buy Elliott Investment Management-backed oil and gas producer Birch Resources, people with knowledge of the discussions say. The all-cash deal could be finalized in the near future, though negotiations are not finished and it could still fall apart.
The Permian Basin is one of the most productive energy regions in the country, and companies have been paying top dollar to get a foothold there.
Diversified Energy is currently the leading bidder in a competitive process, which suggests it beat out other interested buyers to get to this point. The company has been on a shopping spree lately. This deal would follow its $1.3 billion purchase of Maverick Natural Resources last year.
At $1.7 billion, the Birch acquisition would be bigger than the Maverick deal and would significantly expand Diversified's footprint in the Permian Basin.
The pattern is clear. Diversified is using debt and cash to buy up older, established oil and gas properties, then squeezing value out of them over time. It is a strategy that works when energy prices hold up, and it gets uncomfortable when they drop.
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Birch's journey to this point is a story about how money moves through the energy industry after things go wrong.
The assets that became Birch originally belonged to Breitburn Energy Partners, a Los Angeles-based company that went bankrupt after oil prices crashed. Elliott Investment Management, the activist hedge fund, was a creditor to Breitburn. When the company collapsed, Elliott used its position to gain control of the assets.
Elliott and its partners put roughly $775 million into capitalizing the business. If the sale to Diversified goes through at $1.7 billion, that is more than double what Elliott and its partners put in. Not a bad outcome for a fund that picked up the pieces of a bankruptcy.
Investors seemed to take the news in stride. Diversified's stock traded at $14.37 on Thursday, down 0.8%, which suggests the market is not panicking about the deal. It also suggests investors are waiting to see the final terms before making up their minds.
This deal is a reminder that the energy market is still consolidating. Bigger players keep buying up smaller ones, and the companies that survive are the ones with enough cash to keep acquiring.
For everyday investors, the takeaway is about how much money is still flowing into American oil and gas. The Permian Basin has become the center of gravity for the industry, and the companies that own land there are sitting on increasingly valuable assets.
The risk is that Diversified is taking on a lot of debt to make this work. Paying $1.7 billion for a company when your own stock is worth $1 billion is a bold move. It could pay off handsomely if energy prices stay strong. It could also squeeze the company if prices fall.
Watch how this deal gets financed. The details will tell you a lot about whether Diversified's management is confident or overextended. Either way, the next few weeks will be interesting for anyone holding energy stocks.
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