Diamondback Deal Poses Next Test for FTC Scrutiny of Oil Mergers

The Federal Trade Commission’s recent inquiries into oil and gas acquisitions point to antitrust hurdles for Diamondback Energy Inc. and Endeavor Energy Resources LP as the Permian Basin drillers push for a $26 billion merger.

The consolidation of the two companies, announced this week, would form the largest company focused exclusively on exploring the Western Hemisphere’s busiest oil field, straddling Texas and New Mexico. The deal traditionally wouldn’t raise red flags for antitrust enforcers in part because the merged company would still control less than 30% of oil production in the Basin region.

But antitrust attorneys and energy industry experts say the FTC’s scrutiny of oil deals in just the past few months hints at the possibility of a federal probe.

“As recently as four or five years ago, it would have been very hard to predict enforcement action in the context of these deals. It would’ve seemed almost impossible,” said Jeffrey Oliver, a partner at Baker Botts LLP and former FTC attorney focused on oil and gas deals. “Now, it’s cloudy.”

The FTC sought additional information in December about two other high-profile oil and gas deals—one involving Exxon Mobil Corp., and the other eyed by Chevron Corp. The agency is investigating whether the mergers could pose anticompetitive risk and violate antitrust laws amid a wave of consolidation in the oil and gas sector.

The FTC’s information requests came after Senate Majority Leader Chuck Schumer (D-N.Y.) urged the agency to look into the mega-deals: Exxon’s proposed $60 billion acquisition of Pioneer Natural Resources Co., and Chevron’s proposed $53 billion purchase of Hess Corp.

The FTC’s decision to issue second requests for the Exxon and Chevron deals is “an indication that they’re inclined to be aggressive toward this recent round of consolidation,” Oliver said, referring to current uptick in oil mergers as the biggest wave of consolidation in the industry in 20 years. Companies in the Permian Basin are looking to combine forces to more efficiently harness technology for oil extraction and increase profits.

‘Not One Merger’

Mergers that create a firm with over a 30% share in any given market threaten to substantially lessen competition, according to the FTC and Justice Department’s new merger guidelines released in December.

Attorneys and analysts say it’s not clear the Diamondback and Endeavor merger would approach that threshold, meaning it might not raise red flags for regulators based on market share metrics alone.

But the FTC is likely to consider the broader context of widespread consolidation in the oil and gas industry when assessing the deal, said Michael Noel, a professor at Texas Tech University who teaches antitrust.

“It’s not one merger—it’s a lot of mergers,” Noel said. “It’s impossible for the FTC not to be cognizant of all these mergers at the same time.”

In its other recent inquiries, the FTC stepped up its scrutiny of Exxon and Chevron regardless of their likely post-merger market share. Exxon says it will still account for just 5% of US oil production after the deal, while Chevron says its portfolio has little overlap with Hess’s. Both companies have said they are working cooperatively with the FTC in its reviews.

An FTC spokesperson declined to comment on the Diamondback acquisition or the agency’s investigations into the Exxon and Chevron deals. Diamondback didn’t respond to a request for comment on the merger, while an Endeavor spokesperson declined to share more than the company’s public announcement of the deal.

In a statement this week announcing the merger, Diamondback CEO Travis Stice called it a “seamless integration.” The company said it expects the deal to close in the fourth quarter of 2024, pending approval by federal regulators.

Mega-Deals

The torrent of oil mega-deals in recent months could factor into Diamondback’s push to close its acquisition of Endeavor, Noel said. If federal regulators greenlight deals by other major oil and gas companies, that could only worsen Diamondback’s chances of getting theirs approved, as the number of players in the market continues to shrink.

Diamondback, Noel added, is “getting their cards out quickly to make sure if this consolidation happens, they’re included in that conversation.”

But David Deckelbaum, managing director of energy research at TD Cowen, said Diamondback’s decisions are likely unrelated to the regulatory environment or perceptions of future consolidation.

The Diamondback deal doesn’t appear to pose a risk of cornering the midstream market—activities that include processing, storing, and transporting oil, Deckelbaum said. He estimated the merged company would control just 8% of Permian Basin oil production after the acquisition. The Basin is “heavily fragmented” despite recent consolidation, he said.

“The FTC has to judge each individual deal on its own merits, as opposed to the risk of creating more antitrust issues going forward,” Deckelbaum said.