Oil & Gas News

Earthstone Energy acquires $604MM in Permian Basin assets as Omicron threatens market


By: Adrian Hedden – Carlsbad Current-Argus – Earthstone Energy, a Texas-based oil and gas company bought about $600 million in lands in southeast New Mexico to develop fossil fuels after a year of market recovery throughout the Permian Basin and U.S.

Earthstone Energy announced on Dec. 16 it entered a deal with Chisholm Energy to acquire its assets in the northern Delaware Basin, one of the Permian’s most active sub-basins, for $604 million.

The deal was expected to close in the first quarter of 2022.

Presently, the assets’ total production was valued at about 13,500 barrels of oil per day on about 36,1000 net acres in Eddy and Lea counties.

Operations targeted the prolific Wolfcamp and Bonespring formations and will include an ongoing two-rig drilling program that Earthstone said it will maintain. The acquisition will increase Earthstone’s production by about 39 percent, per a news release, and grows the company’s Permian Basin acreage by more than 35 percent to 138,000 acres.

In 2022, Earthstone plans to run four rigs with the two Delaware Basin rigs joining two others in the Midland Basin on the eastern side of the Permian.

Earthstone Chief Executive Officer Robert Anderson said the move would expand the company’s Permian Basin acreage to capitalize on growth in the region, following four earlier acquisitions in the basin that increased Earthstone’s acreage by 400 percent and tripled production in 2021.

“The Chisholm Acquisition caps off a series of highly-accretive and value-adding transactions that have dramatically transformed Earthstone during 2021 and further establishes Earthstone as a Permian Basin focused company with increasing scale,” Anderson said.

“In particular, the Chisholm Acquisition expands our operations into the Delaware Basin with low cost, high margin assets that are generating significant production and cash flow from existing producing wells while also providing growth opportunities from a high-return drilling inventory.”

He said the northern Delaware sub-basin was especially sought after by energy companies for its high rate of return and rate of production.

“Our increased inventory of high-return drilling locations will enhance our organic growth,” Anderson said. “Through a four-rig drilling program in 2022 we expect to be free cash flow positive and continue our current momentum.”

Permian Basin rigs continued to grow in the last week, as the basin added two rigs as of Friday for a total of 288.

In the last year, the Permian added 114 rigs as the fossil fuel markets recovered from the COVID-19 pandemic and fuel demands grew.

New Mexico dropped one rig for a total of 89, up 23 from a year ago while Texas was at 275 rigs, after an increase of three in the last week and a growth of 117 in the last year.

The price of oil appeared to lower this week from 2021’s peak of about $84 per barrel reported on Nov. 11, per Nasdaq, with the price per barrel at about $71 as of Tuesday.

The U.S. Energy Information Administration expected 2022 to see prices lower than 2021’s highs as production rose to meet demand on the heels of COVID-19.

Further pushing prices downward, the EIA predicted, was the announced release of 50 million barrels of oil from the U.S.’ Strategic Petroleum Reserve announced in November – the largest release from the reserve in history.

The EIA forecast oil prices would average at about $70 per barrel in 2022, per a Dec. 7 report, further strained by the possible resurgence of the virus and its omicron variant.

“This is a very complicated environment for the entire energy sector,” said EIA Acting Administrator Steve Nalley. “Our forecasts for petroleum and other energy prices, consumption, and production could change significantly as we learn more about how responses to the omicron variant could affect oil demand and the broader economy.”

Research from international energy analytics firm Rystad Energy also showed the omicron variant could mean less oil demand in 2022.

A report earlier this month showed the variant could cost the global market up to 2.9 million barrels per day (bpd) in demand by the first quarter of next year if more lockdowns and travel restrictions are implemented.

If the variant spreads rapidly and restrictions are imposed, Rystad predicted demand could fall by up to 4.2 million bpd in January 2022.

“The likelihood of increasing lockdowns in the coming months has risen dramatically due to the new omicron variant, and this will undoubtedly impact global oil demand,” said Claudio Galimberti, senior vice president of analysis at Rystad Energy.

“Given the early stage of the variant outbreak and the unknowns related to contagiousness and vaccine efficacy, we can only hope this scenario turns out to be a false alarm.”

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