Matt Zborowski
Assistant Editor
The US exploration and production segment has undergone a dramatic transformation over the past 2½ years necessitated by lower crude oil prices. Emerging as something of standard bearer in a new, post-$100/bbl oil industry has been the Permian basin of West Texas and southeastern New Mexico.
Since last summer when West Texas Intermediate prices stabilized in the $40-50/bbl range, US producers such as Anadarko Petroleum Corp., SM Energy Co., and WPX Energy Inc. have divested non-Permian assets to narrow their focuses on the region, while existing pure-play Permian firms such as Parsley Energy Inc., Diamondback Energy Inc., and Concho Resources Inc. have doubled down.
IHS Markit noted in analysis published last month that Permian deals as a percentage of total US deals had risen to 40% at that point compared with just 7% in 2011. The average acquisition price had risen to more than $30,000/acre, with some recent deals surpassing $40,000/acre.
SM Energy, for example, acquired 35,700 acres from QStar LLC at $45,000/acre in a deal that closed in December. While IHS Markit said SM Energy "paid the current rate for Permian properties," it warned "the acreage comes with very little well control, and was financed with sales of producing properties, shares, and debt."
Still worth it?
In a yearend survey of oil and gas executives in the US Eleventh District, which covers Texas, southern New Mexico, and North Louisiana, the Federal Reserve Bank of Dallas solicited thoughts on acreage prices in the region's mergers and acquisitions hotspot heading into 2017.
A majority of the respondents-of which 67 were from E&P firms and 80 from oil field services-expressed concerns over the basin's shifting market, and some questioned whether recent deals made economic and operational sense.
"With companies suggesting that as many as 64 wellbores are possible in one section in the Delaware basin, it is not surprising that acreage prices have skyrocketed," said one respondent. "In many cases this is a multi-decade proposition. To suggest to investors that this is possible is probably acceptable…but to suggest that it is achievable, is, at least, suspicious. There will be a day of reckoning in how high the acreage cost goes. If we stay in the $45-55[/bbl] range, then many of these 'prospects' will be uneconomic."
Another said, "I feel that prices paid per acre in large transactions have probably gone past the reasonable economic limit. I seriously question the actual recoverable reserves that the growing public companies are projecting."
The most impassioned response came from an executive critical of private equity (PE) activity. "The Permian transactions are approaching price multiples associated with a bubble or a Ponzi scheme," the respondent said. "Multiple private equity-backed buyers are simply trading assets from one to the other-very similar to transactions we witnessed in the early '80s real estate bubble, the tech bubble of 1998-2001 when venture capital firms coinvested with each other to drive up paper gains, and the oil transactions prior to 2014 when every PE fund, pension, and endowment manager needed shale in their portfolios."
But what's better?
For other executives, however, the Permian still represents a one-of-a-kind opportunity unmatched by other North American plays. "While the Permian appears pricey, it is a multibench, multiyear play and 'they aren't making any more of it,'" one basin backer noted. "In the long run, the Permian players will look smart having created a multiyear drilling inventory in today's price environment."
Another said, "Some may feel acreage values are overvalued, but taking into account the number of potential zones and wells that can be drilled per section, it could be argued that they are fairly valued and could possibly continue to rise."
Some producers have instead sought acreage in the much smaller Sooner Trend Anadarko basin Canadian and Kingfisher (STACK) counties play of Oklahoma, but prices there have been rising too. It serves as a reminder that, at 75,000 sq miles, only the Permian can come close to bearing the weight of an entire industry.
