It’s buy or be bought as shale deals remake Permian

HOUSTONFirst came the land grab, then came rapid production growth. Now, a wave of industry-consolidation could be the next big happening in the Permian Basin, America’s most productive shale region.

Pressure from activist shareholders, rising costs and pipeline constraints have all helped spark more than US$30 billion (RM123 billion) in acquisitions in the oil patch since March. More may be on the way.

Parsley Energy Inc, with a market value of around US$9 billion, has long been seen by analysts as a target with its low debt and large positions within the Permian.

Carrizo Oil & Gas Inc, Abraxas Petroleum Corp and Resolute Energy Corp — smaller drillers with productive holdings — may also be on the block, said Ben Dell, managing partner at Kimmeridge Energy Management Co.

“It’s a game of chess right now,” said Dell, whose New York-based company holds about US$1.1 billion in energy assets.

“I’m not sure the majors are necessarily part of that consolidation, but I do think you’ll end up with three or four large-scale pure-play Permian names.”

Messages seeking comment from all four potential targets weren’t immediately returned on Wednesday.

As for the acquirers, look to oil producers who have already completed billion-dollar deals, Leo Mariani, an Austin-based analyst at NatAlliance Securities LLC, said in a note: Diamondback Energy Inc, Concho Resources Inc, Noble Energy Inc and Occidental Petroleum Corp.

Who probably won’t be buying, according to Dell? The behemoths: Exxon Mobil Corp, Royal Dutch Shell plc and BP plc, which last month announced its own US$10.5 billion purchase of BHP Billiton Ltd’s shale assets.

But don’t take that to the bank: NatAlliance’s Mariani includes Exxon in his list of potential acquirers.

The Permian has dozens of public and private operators who compete for services, pipelines and capital.

But the companies often work together to exchange drilling rights in certain areas to create contiguous acreage.

The end result of this constant shuffle: A messy checkerboard of drilling rights resulting from more than 100 years of production, booms and busts, and technology improvements that reawakened previously overlooked or abandoned areas of West Texas and New Mexico.

Now, though, the dynamics may be shifting. Analysts have long predicted a wave of consolidation in a basin where production is seen rising to 3.42 million barrels a day by September, according to federal forecasts. That’s more than double the production just five years ago.

“Our industry has transformed into a manufacturing business and those operators that convert resources into cashflow at the lowest cost will win in the long run,” Diamondback CEO Travis Stice told analysts on a conference call on Wednesday, the day after his company announced an US$8.4 billion all-stock deal to acquire Energen Corp.

The benefits of fewer players are obvious — “operational and capital efficiencies” are key, according to Rystad Energy, the Oslo-based industry research firm.

Consolidation also offers acquirers greater clout when it comes to securing oilfield services, workers and pipelines.

Still, price and funding remains a clear stumbling block. Investors have been keen to stress that shale producers must start spending less on capital than they generate in cash to help boost returns.

That’s why Diamondback’s deal for Energen was funded by stock, not cash.

“As the second large Permian corporate acquisition announced this year, this transaction is likely to increase urgency for other Permian players looking to add scale,” Gordon Douthat, an analyst at Well Fargo & Co wrote in a note.

“One less target is on the block, and Permian peers likely outperform on the news.” — Bloomberg