The great Permian Basin land rush is over. With the top acreage gobbled up, few companies are staking new claims. Instead, the industry is entering a new phase of consolidation that will likely drive small and mid-sized firms from the West Texas shale play as energy companies buy up competitors to expand holdings in the world’s hottest oil-producing region, analysts said.
By Jordan Blum, Houston Chronicle
Since the bottom of the last oil bust in early 2016, wildcatters, private equity investors, independents and oil majors have flocked to the West Texas shale play, driving up land prices to as high as $60,000 an acre and leaving more production companies with land holdings there than drilling rigs. That has set the stage for a wave of mergers and acquisitions.
“It’s kill or be killed,” said Ethan Bellamy, an energy analyst at Robert W. Baird & Co. “The Permian Basin is the Beverly Hills of oil, so it’s no surprise that M&A is heating up foremost in that marquee region.”
Midland land deals
The latest example is the biggest U.S. oil and gas deal in six years, one that will combine two oil and gas producers focused exclusively on the Permian. Concho Resources of Midland said last month that it will pay $8 billion to buy RSP Permian of Dallas, primarily to pick up 100,000 net acres contiguous to Concho’s Permian holdings.
Putting together large blocks of land has become particularly important as horizontal drilling, which cuts across shale formations to tap multiple reservoirs, has become state-of-the-art. Concho CEO Tim Leach said in a recent call with analysts that the acquisition would allow his company to drill more and longer wells from a single location, reducing expenses on oilfield services such as rigs, hydraulic fracturing crews, water, sand and chemicals.
“It’s not getting bigger just for the sake of getting big,” Leach told analysts. “There will be a preference going forward for larger, blockier sets of assets.”
That preference is part of the drive for greater efficiency and lower production costs by oil and gas companies in an era of rising, but relatively low prices. The biggest players in the Permian, including large independents such as Occidental Petroleum of Houston and Pioneer Natural Resources of Dallas and oil majors such as Exxon Mobil and Chevron, are following factory models as they exploit the shale play, drilling wells closer together as consistently and similarly as possible to maximize production.
As with manufacturing, the key to success is scale: producing at volumes that lower the cost of individual units. And in the Permian, analysts said, scale means more land and more consolidations.
John Freeman, an analyst at the financial services firm Raymond James, said he expects the number of producers in the West Texas oil field to potentially fall by half in the next five years.
“You’re going to have dramatically fewer companies operating in the Permian,” Freeman said.
The Permian land rush peaked in the first quarter of 2017 with nearly $18 billion in Permian deals – primarily acreage sales. Those deals fell off sharply in the second half of last year to less than $4 billion in the final six months of 2017, according to the research firm IHS Markit.
Permian land deals rebounded to $10 billion in the first three months of this year, according to IHS Markit, but that was nearly all the result of Concho Resource’s purchase of RSP Permian, signaling the shift from acreage sales to mergers and acquisitions.
In many ways, the shift is driven by numbers. More than 500 exploration and production companies have holdings in the Permian while there are fewer than 450 rigs operating in the oil field. In other words, there aren’t enough rigs, fracking crews and money to go around, analysts said, making consolidation inevitable.
It won’t necessarily come quickly, however. A lot of smaller companies may feel undervalued by Wall Street and be reluctant to sell, Freeman said. And large investors may push companies to spend conservatively and devote money to shareholder payouts, rather than acquisitions.
But Pavel Molchanov, another Raymond James analyst, said that the prolific Permian is perhaps the only U.S. oil field that could inspire investors to support spending more and growing faster.
“The Permian remains very hot – to state the obvious,” Molchanov said, “and the industry appetite for consolidation is certainly real.”
Likely acquisition targets, analysts said, would be “pure play” companies focused exclusively on land deals in the Permian. Freeman said they could include companies such as Laredo Energy of Houston, Parsley Energy of Austin, Callon Petroleum of Mississippi and Denver-based players such as QEP Resources, Jagged Peak Energy, and Centennial Resource Development.
Private equity companies, meanwhile, are working to flip their oil and gas holdings for big profits and move onto to other regions where they think they can find oil and reserves at better values.
The big players
Concho, Occidental, Pioneer, Exxon Mobil, and Chevron could all be looking to add to their holdings, as could EOG Resources and Anadarko Petroleum, both of Houston, and Diamondback Energy of Midland, according to analysts. Exxon, which plans to triple its Permian production by 2025, last year made one of the last big acreage buys in the Permian when it paid $6.6 billion for the holdings of the Bass Family of Fort Worth.
In the near term, analysts said, the most frequent land deals in the Permian will be land swaps among the top players as they try to add contiguous holdings and build their blocks of land. And as they move ahead and begin mass production, the character of the Permian, where wildcatters have long roamed and small companies once could hit it big, will change.