Diversified in talks to acquire Birch in Permian expansion

US producer Diversified Energy confirmed in a filing with the US Securities and Exchange Commission (SEC) last week that it has held preliminary discussions on a potential acquisition of Birch Resources. The confirmation came a day after Bloomberg reported on August 13 that the company was in “advanced” talks according to sources familiar with the matter.

Bloomberg’s sources said that Diversified could acquire Birch for more than $1.7bn in cash. They added that Diversified was poised to emerge as the winner in a competitive sale process. However, the sources also cautioned that no deal had yet been made and that discussions could grind to a halt, another buyer could emerge or the timing of a potential deal could change.

In its August 14 SEC filing, Diversified did not provide further details beyond saying that discussions were ongoing and that they remained at an early stage. It also added that there was no certainty that an agreement would be reached.

While the confirmation contradicts Bloomberg’s sources in terms of how advanced the talks are, it nonetheless signals the direction that Diversified wishes to head in. The transaction would boost Diversified’s position in the Permian Basin, following its acquisition of Maverick Natural Resources for $1.3bn last year. Maverick operated across multiple basins, including the Permian.

Birch is backed by Elliott Investment Management, which was part of a group of investors that acquired the company’s assets from Breitburn Energy Partners in 2018. Breitburn had gone into insolvency and Elliott used its status as a creditor to Breitburn to take control of its Permian holdings, its most valuable assets, along with other investors, according to regulatory filings cited by Bloomberg. The news service added that these investors capitalised the business with about $775mn, according to those filings.

Diversified produces primarily natural gas from mature assets, but its expansion in the Permian illustrates that this could be changing. In addition, while Birch’s website is marked as being under construction and does not provide any information about the company, it is understood to own undeveloped acreage among its assets, according to KeyBanc Capital Markets. This would represent a shift away from Diversified’s previous focus on mature assets.

Separately, Diversified also agreed in May to buy Anadarko Basin oil and gas assets from Camino Natural Resources for $1.175bn, in partnership with investment firm Carlyle.