By January 8, 2017 0 Comments Read More →

Tall City Exploration case study: Permian Basin hotbed of deal-making

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Tall City wells acquired by Yantai Xinchao: breakevens in comparison with offset wells and core area (click to enlarge)

Tall City Exploration sold 78,000 acres of Permian Basin assets to for $1.1 billion to Chinese company

Oil and gas mergers and acquisitions in the US Lower 48 were down 70 per cent in 2015 over 2014 (50 per cent lower on the 10-year average), according to Wood Mackenzie, but deals can still be made in the Permian Basin of West Texas.

Wood Mackenzie’s upstream analysts use their Well Analysis Tool to generate integrated analytics on done deals and screen candidates for future opportunities.

A once-hot M&A market in the US Lower 48 has cooled substantially in the wake of the oil price collapse that closed out 2015 and lingered into 2016, bringing spending down with it.

With asset valuations now adjusting to a much lower oil price outlook, now may be a great opportunities for buyers: cash-stressed companies present attractive investment opportunities to more robust operators and private equity-backed firms, including Asia-based companies with ample financial backing.

Permian Basin: The case of Tall City Exploration

The Permian Basin is one of the hotbeds of deal-making in the current climate.

Some private operators that lack deep capital but possess strong geological acumen are working to build up acreage then prove its potential with some attractive well results — the end game resulting in asset divestiture or IPO.

Tall City Exploration is a prime example, selling 78,000 acres of Permian assets to Chinese firm Yantai Xinchao Industry for US$1.1 billion in Oct. 2015.

With its origins in the fashion industry, Yantai Xinchao may seem like an unlikely candidate for upstream investment in the US Lower 48, but smaller Chinese companies are increasingly looking overseas for investment opportunities.

Regulations from the US Committee on Foreign Investment present one of the hurdles, but worth it to Yantai Xinchao to surmount an inability to compete in China where state-owned entities dominate the upstream landscape.

Tall City well analysis

The Tall City wells acquired by Yantai Xinchao are located on the fringes of the Permian Basin.

Wood Mackenzie’s estimate of well-level costs, in combination with the Well Analysis Tool’s type curve generator and economics functionality, allowed them to easily compare the economics of type curves based on Tall City’s and offset wells.

On this basis, Tall City’s wells achieve liquid breakevens within $5/bbl of their offsets, indicating a well design/operational strategy well suited to extract value from the local geology.

As confidence in closing deals in the Lower 48 continues to grow, the need for robust screening tools will become increasingly paramount.

Identifying the best opportunities, however, remains challenging given the inconsistent and unreliable nature of available data, according to Wood Mackenzie.

Effective screening necessitates access to cleansed data that leaves behind the inconsistencies of an untidy source; meaningful analytics on well performance and cost estimates; and the ability to generate type curves and economic scenarios quickly.

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