Permian Oil Field Is ‘Last Man Standing’ in Worldwide Collapseby
M&A activity in No. 1 U.S. oil field continues accelerating
RSP says Silver Hill deal adds decades of drilling sites
The biggest U.S. oil field just keeps getting bigger as explorers discover so many rich new pockets of crude that investors are more than willing to look past the slump in oil prices to bankroll ambitious drilling and acquisition programs.
Oil producers eager to snap up drilling rights in the Permian Basin of Texas and New Mexico committed more than $12 billion of acquisition capital in the past four months, even though many explorers with positions in the region are still figuring out how large their oil fields are, according to analysts at Barclays Plc. That means the pace of acquisitions will continue and probably intensify in a region where oil companies have been slashing the cost to produce each barrel of oil.
The Permian land rush reached a new crescendo last week when RSP Permian Inc. announced a $2.4 billion deal to buy Silver Hill Energy Partners’ fields in the Permian’s western wing, the Delaware Basin. RSP will pay the equivalent of $45,000 per acre of drilling rights, a heretofore unheard of price for Delaware Basin assets, to secure 3,200 potential well sites that the company said will take decades to drill. On Tuesday, SM Energy Co. announced the $1.6 billion purchase of Permian drilling rights from QStar LLC.
“Capital moves to the lowest-cost plays and in today’s price environment, the Permian is the last man standing,” Gabriele Sorbara, an analyst at Williams Capital Group Plc. “In some spots, people can break even at $20 or $30 a barrel.”
Oil producers crippled by the worst oil-market rout in decades have been shutting down exploration in marquee oil provinces from the Gulf of Mexico to Africa and flocking to West Texas, where the Permian’s deep layers of oil-soaked rocks present one of the few profitable drilling horizons in the world today.
Dallas-based RSP, which went public less than three years ago, said some of the wells it’s acquiring are gushing so much crude that they’re posting 70 percent rates of return. RSP said last week that it intends to hire some Silver Hill employees. Silver Hill engineers boosted profitability of new wells through innovations such as packing in as much as 2,000 pounds (907 kilograms) of sand to frack each foot of a new well, creating bigger and more widespread cracks in the surrounding rocks for crude to flow through.
The Silver Hill assets include some of the thickest rock layers in the Delaware Basin and are among the deepest in the region, according to RSP. That’s a boon for the acquirer because it means higher underground pressure that will push more crude to the surface more quickly, increasing profits.
Last month, Apache Corp. stunned the oil industry when it discovered the “immense” Alpine High field in a backwater area of the Permian long written off by other drillers as a bust.
Oil field valuations in the Delaware Basin are climbing upward toward those on its more-prolific eastern edge, the Midland Basin. As recently as six months ago, Delaware fields were selling for 60 percent less than Midland assets; as of last week after RSP’s monster deal, that gap had shrunk to 25 percent.
The buying spree for Permian assets is expected to persist in coming months, Sorbara said. Investors are shrugging off stock sales dilutive to their own holdings that are being used to fund deals because the acquisitions are seen as ultimately worth the temporary pain. Pure-play Permian drillers are trading at a premium to rival companies that have only some or none of their exploration in the region, said the team of Barclays analysts that includes Jeffrey Robertson and Oswald Cheung.
The pure-play Permian group is trading at an average of about 8.6 times a measure of their estimated 2018 return on investment, compared to 6.9 percent for the entire mid-cap exploration and production segment, according to Barclays.
“The Permian Basin has undergone a wave of consolidation over the past couple of years,” the Barclays analysts wrote in an Oct. 17 note to clients. “We expect this trend to continue, driven by bolt-on acquisitions in the Midland Basin, and larger resource capture in the Delaware Basin."
Next on the auction block among Permian explorers could be Jagged Peak Energy LLC, Brigham Resources LLC and Patriot Energy Inc., said Sam Burwell, an analyst at Canaccord Genuity Inc. in New York.
To be sure, escalating asset prices are scaring away some would-be suitors, said Gabriele Sorbara, an analyst at Williams Capital in New York. RSP, a $5.2 billion company, prevailed in the bidding war for Silver Hill over heavy-hitters such as Occidental Petroleum Corp., which has a market value more than 10 times larger.
“We expect M&A activity to remain elevated; however, some are unwilling to participate in the frothy valuations,” Sorbara said in a note to clients.