Loosening the purse strings in the Permian
The Permian and pipelines are hotspots as transactions picks up
The oil industry's animal spirits are rousing again as the shock of the worst downturn in a generation fades. For proof, look to the Permian shale where deal making is surging as companies look to carve out their slice of the hottest oilfield on the planet.
So far this year around 100 deals worth more than $14bn have been done in the Permian, far more than in any other region. More are likely. The biggest came in early September when EOG Resources spent $2.5bn to buy Yates Petroleum, which drilled its first Permian well in 1924 and had a highly sought after portfolio of prospects. EOG was especially keen on Yates's 186,000 acres in the emerging Delaware section of the West Texas play, which remains sparsely developed but has shown some of the most promising results of any shale area in the US. EOG said the agreement added 1,740 new drilling spots that would return at least 30% at $40 oil.
The Permian has been a refuge for oil drillers amid sub-$50 oil prices as companies look for assets that can deliver profitability quickly. The rig count is up around 50% from its lows in April and it is the only tight oil play where production is on the rise. The Permian also carries a certain cachet with the market-its drillers have had little trouble accessing debt and equity markets even at a time when cash is scarce for the industry. As well as EOG, Concho Resources and PDC Energy have completed $1bn-plus deals, but most have been smaller as companies either look for a foothold in the play or to buy adjacent properties.
All of this activity has some wondering if Permian acreage is getting too pricey. EOG's deal valued Yates's properties at around $10,000 per acre. Elsewhere, valuations have climbed well north of $40,000 an acre. Callon Petroleum spent $45,500 an acre to buy around 5,700 acres of land next to its existing position in Howard County in the Midland section of the play in September.
Analysts at BTU Analytics, a consultancy, looked at it from a different perspective: establishing a value per drilling location-essentially per well. The company found that recent deals were valuing each drilling location at $1.5m-3m. (The Callon deal valued each drilling prospect at $2.3m.) As companies don't typically include what they paid to acquire the land when they talk about well costs, it means that a $6m well will cost north of $8m for Callon when land acquisition is taken into account.
The run-up in deal values prompted BP's chief executive Bob Dudley to claim in September that his company-which doesn't have an established position in the Permian-is looking to cheaper areas like Argentina's Vaca Muerta.
The Permian isn't the only corner of America's energy market seeing more M&A after a lull during much of 2015 and early 2016 when price volatility complicated negotiations. Rice Energy bought out privately held Vantage Energy in the Marcellus shale for $2.7bn, after a sustained rise in US natural gas prices has lifted hopes for drillers. Anadarko Petroleum bought Freeport McMoran's deep-water Gulf of Mexico business for $2bn as it looks for new tieback opportunities-a strategy other companies are also pursuing.
The midstream and oilfield-service sectors are also being shaken up by the downturn as stronger companies use the crisis as an opportunity to bolster their portfolios. With Enbridge's $28bn Spectra Energy takeover the company gained access to gas pipelines in the northeast, one of the midstream's few growth areas. Others are likely to follow as opportunities to build energy infrastructure dry up.
The battered oilfield-services sector-which has borne the brunt of upstream cost cutting-is also facing a wave of consolidation. Halliburton's play for Baker Hughes was blocked by anti-trust authorities, but it showed an appetite for megamergers in the sector as the top tier service companies try to keep pace with Schlumberger. There will also be smaller deals aimed at gaining access to thriving parts of the services market. For instance, as producers pump more sand into each well they drill to improve initial output from fracked wells, having access to the sand supply chain is becoming more lucrative. Sand suppliers like US Silica and Hi-Crush Partners have seen their valuations more than double over the past year.
This article is part of a report on US energy. Next article: America's pipeline wars