Permian Basin acreage hotter than 4th of July in Midland; $20 Billion spent – IHS

Permian Basin M&A activity accelerates as companies seek profitability at current prices

Driven by the potential for profit at current oil prices, oil and gas companies are clamoring for more acreage in the Permian Basin and its sub-plays, spending close to $20 billion year-to-date in 2016, according to new analysis from IHS Markit.

The spending outlay was for 24 merger and acquisition (M&A) deals larger than $50 million in size. The Permian basin is a sedimentary basin located primarily in western Texas and extends into southeastern New Mexico.

“From an M&A perspective, the Permian Basin is hotter than the Fourth of July in Midland,” said analysis author Andrew Byrne, director of energy company and transaction research at IHS Markit.

According to the IHS Markit Company Play Analysis: M&A Activity Picking Up in the Permian, the pace of deal flows will continue to accelerate, since the pace of acquisition activity ramped up dramatically in 2016, particularly in the third quarter, and shows no signs of slowing as 2017 approaches.

“The Permian area is now considered the top U.S. onshore liquids region, and this popularity is driving an increase in deal flow in the area. The increase has been quite dramatic, since deals in the Permian — as a percentage of total U.S. deals — have risen from 7 percent in 2011, to 40 percent year-to-date. At 40 percent of total U.S. deal values, the Permian is now the premier M&A target in the U.S,” said Byrne.

Byrne described the Permian deals as primarily acreage deals, and sees the M&A craze in the region just beginning given both the optimism surrounding the Permian’s well economics and fragmented land ownership in both the Midland and Delaware basins.

In an IHS Markit report issued recently entitled, “IHS Herold Company Play Analysis: Delaware Basin: The Strong Get Smarter; Remarkable Profitability at Current Prices,” researchers examined how a handful of dominant oil and gas companies operating in established sub-plays in the Delaware Basin are delivering remarkable profitability at current prices.

According to that analysis, producers were able to deliver this profitability, in part, due to their early entry into the play, and their extensive technical knowledge of the local geology.

“We at IHS Markit believe the premier status of the Permian Basin results from its overall in-place oil resources, aided by five or more target pay zones. Contributing factors also include the improving well economics and optimism that the region can generate high enough returns to be widely economic at oil prices around $45 per barrel or less. All of these elements combined have caused the stocks of companies focused on the Permian to trade at a premium relative to non-Permian peers,” said Byrne.

These factors also make the Permian the place to be right now, so companies that are not currently operating in the Permian want to enter the play, and companies with an existing position want to increase their acreage holdings, he said.

“The Permian M&A market is highly competitive, with some buyers paying top dollar for acreage containing minimal production, and in some cases, no horizontal wells. The average acquisition price this year has increased to more than $30,000 per acre, including some recent transactions at well above $40,000 per acre. While we believe $20 billion is a lot of money for the sector to spend on acreage, the deals are being financed by secondary share offerings and in most cases the buyer’s stock has gone up on the day of the announcement,” said Byrne.

Recent dealmakers in the basin include RSP Permian, which acquired 41,000 acres from Silver Hill Energy Partners.

The acreage is located in the Delaware Basin in eastern Loving County, Texas, and was acquired at what IHS Markit views as the high-end of the deals’ rumored range of $2 billion to $2.5 billion.

According to IHS Markit, the deal-per-acre is commensurate with enterprise valuations enjoyed only by the most highly regarded companies in the E&P sector, which all happen to be pure-Permian plays.

SM Energy purchased 35,700 acres from QStar LLC for $1.6 billion, which more than doubles the company’s Permian Basin position.

At $45,000 per acre, IHS Markit analysis said the company paid the current rate for Permian properties, but cautioned the acreage comes with “very little well control, and was financed with sales of producing properties, shares and debt.”

In addition to M&A transactions, there has also been a new discovery in the region, with Apache Corporation’s recent announcement that it had made a significant new oil and gas discovery in the southern portion of the Delaware Basin in west Texas.

The Apache discovery, which the company has dubbed the “Alpine High” play, lies primarily in Reeves County, Texas, not far from the New Mexico border, but still within the prolific Permian Basin.

Apache has secured more than 300,000 contiguous acres in the area at an attractive cost of around $1,300 per acre.

The company said it believes its acreage holds an estimated in-place hydrocarbon resource of 75 trillion cubic feet (TCF) of gas and 3 billion barrels of oil in the Barnett and Woodford shales.

The company also sees additional oil potential in the shallower Pennsylvanian, Bone Springs and Wolfcamp formations.