Business Context and Reporting Period
This Form 8-K, dated November 15, 2018, reports on Diamondback Energy, Inc.'s proposed merger with Energen Corporation. The filing serves as a supplement to the definitive joint proxy statement/prospectus filed on October 25, 2018, in response to shareholder litigation. Special meetings for stockholders of both companies are scheduled for November 27, 2018, to vote on the merger.
Key Financial Metrics and Valuation
The filing does not contain Diamondback's or Energen's current revenue, profit, cash flow, or debt figures. Instead, it provides valuation metrics derived from financial advisor opinions (J.P. Morgan and TPH) used to justify the merger consideration:
- Transaction Value Basis: Energen transaction value estimated at $9,391 million based on market price as of August 10, 2018.
- Implied Equity Value Range (J.P. Morgan): $76.75 to $111.00 per share for Energen common stock.
- Valuation Multiples (J.P. Morgan):
- Adjusted Transaction Value to Net Acreage: $35,000 - $55,000 per acre.
- Transaction Value to 2018E EBITDAX: 8.5x - 10.0x.
- Valuation Multiples (TPH):
- Transaction Value to Proved Reserves: $21.15/boe (Energen) vs. $17.87/boe (Median for 100% equity deals).
- Transaction Value to Current Production: $96,422/boe/d (Energen) vs. $96,109/boe/d (Median for 100% equity deals).
- Transaction Value to EBITDAX: 9.2x/6.8x (FY-1/FY-2) for Energen.
- Premium: The merger offers a 20.2% premium over Energen's share price on August 10, 2018.
Material Changes and Litigation Resolution
The primary material event is the resolution of three lawsuits filed in October 2018 challenging the merger:
- Litigation: Two federal class actions (Gross v. Energen and Stein v. Energen) and one state derivative action (Rosenblatt v. Cohen) alleged violations of the Exchange Act and breach of fiduciary duty, claiming inadequate price and material omissions in the proxy statement.
- Resolution: On November 15, 2018, the parties agreed to resolve the actions. The lawsuits will be dismissed with prejudice as to the named plaintiffs and without prejudice to others.
- Supplemental Disclosures: To resolve the litigation, Diamondback and Energen voluntarily supplemented the proxy statement with details regarding:
- The process of contacting 16 potential counterparties, identifying three "top-tier" candidates (including Diamondback, "Company A," and "Company B").
- Standstill provisions in non-disclosure agreements with Diamondback and Company A.
- Exclusivity agreement terms executed on August 4, 2018.
- Expanded precedent transaction analyses and fee disclosures for financial advisors J.P. Morgan and TPH.
Guidance, Outlook, and Risks
Management Commentary: The companies deny all allegations in the lawsuits, stating the claims are without merit and that no additional disclosure was legally required. The supplemental information is provided solely to resolve litigation and reduce uncertainty.
Risks and Contingencies:
- Merger Completion: Risks include failure to obtain stockholder approval, inability to satisfy conditions, or termination of the Merger Agreement.
- Future Litigation: While current suits are dismissed, additional similar complaints may be filed. The companies will not announce future filings unless they contain materially new allegations.
- Operational Disruption: Risks related to management distraction, retention of key personnel, and supplier/customer relationships.
- Forward-Looking Statements: Actual results may differ due to commodity price fluctuations, production estimates, and capital expenditure timing.
Investor Verification Checklist
- Verify the final vote results from the special meetings scheduled for November 27, 2018.
- Review the full Joint Proxy Statement/Prospectus (Form S-4) for complete financial data on Energen and Diamondback not included in this 8-K.
- Monitor for any new litigation filings following the dismissal of the current actions.
- Confirm the final transaction value and exchange ratio upon merger consummation.
- Assess the impact of the 20.2% premium relative to current market prices for Energen stock.