Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

In case you hadn't heard, the Permian is so hot right now. Two big deals have been announced in this shale nirvana in the past 24 hours, including one by a company you've almost certainly heard of: Exxon Mobil Corp.

It was actually beaten to the punch by Noble Energy Inc., which announced its $3.2 billion takeover of Clayton Williams Energy Inc. on Monday night. As analysts were questioning Noble's management on a Tuesday morning call, Exxon said it had cut a deal for assets owned by the Bass family of Fort Worth, Texas for up to $6.6 billion. Both targets focus on the Delaware basin, a particularly oily patch within the wider Permian shale.

Exploration and production companies have been grabbing land left and right in the Permian, with valuations per acre rising sharply over the past year or so. A quick glance at Clayton Williams's share price over the past decade gives you a sense of  how feverish things have become:

(Almost) Peak Oil
Noble is paying close to Clayton Williams's all-time high, when oil was trading at more than $100 per barrel
Source: Bloomberg

Even that chart doesn't do it full justice. A changing share count means that the implied equity valuation for Clayton Williams is $2.7 billion -- 25 percent higher than the company's peak market capitalization, according to data compiled by Bloomberg.

Both Exxon and Noble have existing positions in the Permian basin -- just not enough to pique investors' interest:

Shaled It
The Permian shale has been the place to be during the oil crash
Source: Bloomberg
Note: Performance index to 100. Permian E&P index is a custom index of 14 Permian-weighted E&P stocks, including Clayton Williams.

Both deals help to address nagging issues for the acquirers.

In Noble's case, Clayton Williams will cement its position in the Permian, giving it a more tangible growth story that is less dependent on the politically and technically challenging Leviathan natural gas project in the eastern Mediterranean. Importantly, the core of the deal is 71,000 acres that sit right alongside Noble's existing position in the Delaware basin, making it easier to actually reap some drilling synergies.

Noble can also effectively play debt arbitrageur here. Clayton Williams was forced to go to Ares Management for financing last year, paying interest rates of up to 15 percent for a $350 million term loan. Most of the $75 million of annual synergies will consist of cheaper interest costs -- significant, since Clayton William's entire estimated Ebitda for 2016 is just $57 million.

Exxon, meanwhile, is also staking a bigger claim to the Permian in what is likely a parting shot from Rex Tillerson, the ex-CEO (and potential U.S. Secretary of State) who took the company into shale big time with 2010's XTO Energy acquisition. While there's little public information on the Bass family assets, Exxon stressed their high weighting to oil, which will help to balance its gassier existing shale position. Exxon will also be able to steal some of rival Chevron Corp.'s Permian thunder with investors and possibly offset the fallout from a potential looming writeoff of some of its Canadian oil-sands reserves.

For those investors who might worry about a bubble in the Permian, a less risky way to join in the thrills is via oilfield-services companies. With deals getting done, buyers will be under pressure to get their newly acquired landholdings to work. Companies such as Superior Energy Services Inc. and Fairmount Santrol Holdings Inc., which provide essential fracking supplies, should be the beneficiaries.

One oil dignitary seems to be on board with this line of thinking: Saudi Arabian energy minister Khalid Al-Falih. Even as these deals were going down in Texas and New Mexico, he was telling a panel in Davos that U.S. shale producers would need higher prices to sustain their recovery. The reason: oilfield-services contractors would raise fees to claw back some of the profits they've given up in the past couple of years.

Recent wage trends in the U.S. oil industry as well as repeated calls for higher pricing by the likes of Schlumberger Ltd. and Halliburton Co. suggest Al-Falih is right.

How far this slows the recovery in U.S. oil production, though, remains an open question.

A persistent theme of the oil crash has been the resiliency of shale output, due in large part to the industry's access to deep pools of capital. Clayton Williams is a case in point, with its resort to private equity and now a cash-and-stock acquisition taking its share price from $7 to $140 in the space of less than a year.

It is notable that shares in both Exxon and Noble rose on Tuesday, unusual for such big acquisitions. The only thing more threatening to OPEC's strategy than the Permian basin is the Permian basin consolidated under fewer, better-capitalized companies.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net