What happened
Shares of California Resources Corp (CRC), Diamondback Energy Inc (FANG -0.82%), and W&T Offshore, Inc. (WTI -0.41%) are down 11.4%, 11.7%, and 8.9% at 1:16 p.m. EDT on Aug. 15. Earlier in trading, all three were even lower before stabilizing near their current trading prices.
Oil prices have a hand in today's big drop. At this writing, Brent crude futures are down more than 2% to $70.88, while West Texas Intermediate futures are down a sharp 3% to below $65 per barrel. That's a multi-month low for both the global and U.S. benchmarks, which haven't traded this low since April and June, respectively.
Image source: Getty Images.
So what
There's a little more to the story for Diamondback and W&T Offshore. Diamondback Energy announced it was acquiring Energen Corp (EGN) in a deal with a total value of $9.2 billion. Diamondback would fund the acquisition entirely with stock, paying 0.6442 Diamondback shares for each Energen share. This will add significant Permian Basin acreage to Diamondback's total, but will also result in an additional $830 million in net debt.
The acquisition of Energen shouldn't come as a surprise for Diamondback shareholders; its CEO has made it clear that M&A is a key part of the company's strategy. And despite the market's reaction today, the company does have a solid track record with its prior acquisitions, though this is a substantial buy that may prove harder to leverage, particularly with the Permian's infrastructure getting maxxed out and it likely to be some time before many of the much-needed pipelines come online. Big, potentially transformative acquisitions often don't work out as well as management says they will, but Diamondback at least has a solid history of delivering per-share value with its past acquisitions.
W&T Offshore also released some news today, and there's far less upside to it than Diamondback's big acquisition. In a surprise move, the company's longtime CFO, Danny Gibbons, retired effective immediately. He will be replaced by Janet Yang, who has been with W&T for about a decade, as acting CFO. The company gave no further detail for its plans for a permanent replacement or why Gibbons retired without any notice.
The abrupt loss of a key executive can be unsettling, and that uncertainty, along with a sharp drop in oil prices, clearly spooked a lot of shareholders into selling today. But it's not likely that Gibbons' retirement signals anything fundamentally different for the company or its prospects.
Now what
While Diamondback and W&T Offshore announced material events that do affect their businesses, the reason behind today's big decline in oil prices bears watching. There could be a coming confluence of events that send oil prices down even farther. According to reports, OPEC's oil production rose in July, even though Saudi Arabia actually reported a decline in output. At the same time, U.S. crude oil inventories increased 6.8 million barrels, a shock to a market that was expecting a 2-plus-million-barrel decline in the stockpile.
U.S. oil production continues to climb higher, even as the peak U.S. summer driving season comes to an end and serious concerns about weakening global oil demand arise.
Put it all together, and today's sell-off for these three independent oil producers is a painful reminder that even the most high-quality oil producers' prospects are heavily tied to something they cannot control: crude oil prices.
