The Permian Basin remains firmly in control of the Lower 48, with Enverus last month describing it as the deal engine of domestic M&A transactions. But it is not invulnerable.
Signs are that even the Permian, facing the same death of a thousand cuts as other basins, may be cooling off. Particularly in the face of commodity price fluctuations, inflation, supply chain crimps and now recession fears, the Permian Basin’s flagging deal flow may have implications beyond Texas and New Mexico.
The Permian Basin’s last major announced E&P deal was a July 5 acquisition by Ring Energy Inc. to buy Stronghold Energy, a privately held operator backed by Warburg Pincus LLC. The agreement will pay Stronghold up to $465 million for assets in the Central Basin Platform, where its operations are focused on the development of about 37,000 net acres located primarily in Crane County, Texas.
In June, Mercer Capital senior financial analyst Justin J. F. Ramirez pointed to the slowing drip in Permian deals. Through the first six months of the year, Mercer counted 21 transactions in the past 12 months, six fewer than the same period that ended in 2021.
Not much has changed since then, with only Ring Energy’s deal having made any ripples in the Permian’s pond.
Notably, the Permian Basin continues to be an area clearly scrutinized.
At least six acreage packages have been offered in the basin since June. And, in late June, Sitio Royalties Corp. disclosed two acquisitions in the Permian Basin worth a combined $547 million as the company pursues a consolidation of large-scale mineral and royalty positions. In July, Canada’s Freehold Royalties Ltd. also entered into separate agreements with two private sellers to acquire interests located in the Permian Basin and Eagle Ford Shale. The Canadian firm said the Permian deals totaled CA$123 million, or roughly US$96 million.
Ramirez was circumspect about what the Permian’s dribbling deal flow might mean if it meant anything at all.
“It is difficult to interpret the significance with any certainty,” Ramirez wrote in June. “On one hand, it could indicate increased trepidation regarding production prospects in the basin. On the other hand, it could simply be a sign that regional E&P operators have started to ‘right-size’ their inventories in the West Texas and Southeast New Mexico basin.”
‘Bang for their buck’
The basin usually defies expectations and funding for deals remains strong.
In mid-June, Double Eagle Energy launched a new venture to aggressively pursue “very large acquisitions” in the Permian Basin with a wallet stuffed with $1.7 billion in equity commitments.
The funding is part of a strategic partnership among Double Eagle and EnCap to form Double Eagle Energy Holdings IV LLC and Tumbleweed Royalty IV LLC. The new entities also received minority investments from Apollo Global Management LLC, Magnetar Capital and other strategic institutional partners.
While Enverus reported in July that the Permian Basin generated about 46% of the second-quarter’s deal value in the U.S. market, deal values have also shown declines.
The median deal size was $387 million, about 4% lower than the median deal size of $405 million in the prior 12-month period, Mercer’s Ramirez said. The median acreage purchased also diminished, with 21,000 net acres in the past year was—42% lower than the 36,250 acres among the deals in the previous year.
“Given the concurrent decrease in acquired acreage and relatively unchanged median transaction price, the median price per net acre was up 16% period-over-period,” Ramirez said. “Looking at acquired production, the median production among transactions over the past year was 5,500 barrel-oil-equivalent per day, a 39% decrease from the 8,950 boe/d metric from the prior year.”
Most Recent Permian Basin Transactions
|Ring Energy||Stronghold Energy II||Crane||$465||$12,568||$51,099|
|Earthstone Energy||Titus Oil & Gas||Eddy, Lea||$627||$79,367||$30,585|
|Sitio Royalties||Foundation Minerals, Momentum Minerals||Andrews, Borden, Crane||$547||$82,078||$156,286|
|Centennial||Colgate||Eddy, Lea, Reees, Ward, Winkler||$3,942||$3,942||$56,314|
|HighPeak Energy||Hannathon Petroleum, Undisclosed||Howard||$373||$7,617||$74,600|
|HighPeak Energy||Undisclosed||Borden, Howard||$161||$4,163||$64,400|
|Earthstone Energy||Bighorn Permian Resources||Crockett, Irion, Reagan, Upton||$860||N/A||$20,283|
|Maverick Natural Resources||ConocoPhillips||Andrews, Ector, Eddy, Lea||$440||$381||$40,000|
|Split Rock Resources||RSC Resources||Eddy, Lea, Glasscock||$98||$23,750||$49,000|
|Earthstone Energy||Chisholm Energy||Eddy, Lea||$604||$4,346||$44,741|
|Northern Oil & Gas||Veritas Energy||Eddy, Lea, Reaves||$407||$12,520||$35,391|
|Colgate Operating||Occidental Petroleum||Eddy, Lea||$190||$7,560||$253,333|
The resulting picture is that the Permian Basin remains highly-priced since the median transaction value remained relatively unchanged despite buyers’ acquiring a lower median production level. The median transaction value per boe/d jumped 54% from $31,886 in the prior 12-month period to $49,143 in the latest 12-month period, Ramirez said.
“This willingness to pay over 50% more per acre and/or per boe/d suggests that these targets’ underlying economics have been, and remain, supportive,” he said. “However, the marginal costs of these acquisitions may be approaching the perceived marginal returns projected for these properties, as evidenced by the decrease in the transaction count relative to last year.”
Ramirez said one metric Mercer analyzed was deal value per production, annualized, per acre. The analysis of 21 transactions, for the second half of 2021 versus the first half of 2022 showed a sharp decline in buyers’ ability to get a “bang for their buck” based on median cost per production.
In the 14 deals transacted from June 2021 through December 2021, the median cost per production acre was $1.072. In the seven deals from January to June, the median skyrocketed to $10.76—a 10x increase in cost per production acre.
“The approach to the marginal ‘equilibrium’ appears to have been a pretty short runway to land on,” Ramirez wrote.
More broadly, as energy prices have risen over the past year, he said its likely a slowdown in the Permian, generally considered the most economic oil and gas basin, is underway.
“If the Permian is a bellwether of U.S. production in general, are we likely to see a slowdown in M&A activity in other basins soon? I would venture to say yes,” he said.
2022-12-02 - The Evolution Pipeline will total 230 miles of pipe in its water recycling system in the Midland Basin, XRI says.
2022-09-19 - The new partnership with the Saudi Data and Artificial Intelligence Authority will use Halliburton’s DS365.ai platform to create data science and AI applications and solutions, the Houston-based oilfield services firm said.
2022-09-23 - TechnipFMC snagged its second large contract in recent weeks with an engineering, procurement, construction and installation contract from Shell.
2022-10-03 - Here’s a roundup of the latest E&P headlines including updates on a Gabonese field and contract wins from the past week in the upstream oil and gas industry.
2022-09-20 - Here’s a roundup of the latest E&P headlines including a new EIS for a project in Australia to contract awards around the globe from the past week in the upstream oil and gas industry.