Permian M&A poised to slow after mega-deals

The frantic pace of deal-making in the US shale patch over the past few months has concentrated ownership of some of the most prized Permian acreage in the hands of bigger operators, but this is now set to ease.

The latest round saw another mega-deal this week, after Diamondback Energy swooped for Endeavor Energy Resources, the most highly sought-after privately held company still standing, in a $26bn cash-and-stock deal. It follows a combined $113bn spent on pending acquisitions by ExxonMobil of Pioneer Natural Resources and Chevron of Hess, and Occidental Petroleum's $12bn move on CrownRock.

Diamondback's transaction creates the largest producer focused exclusively on the Permian, which will lag only ExxonMobil and Chevron in terms of output from the basin with a combined 816,000 b/d of oil equivalent (boe/d), consultancy Wood Mackenzie says. The deal is seen as something of a coup for Diamondback, which reportedly beat off stiff competition from bigger rivals to land its prize.

Endeavor's billionaire founder Autry Stephens, who drilled his first well in 1979, may have found a kindred spirit in Diamondback's chief executive Travis Stice, given their shared record of running low-cost operations with strong well performance. That their respective headquarters are across the street from one another in Midland, Texas likely helped. "We've evaluated every deal in the Permian over the past decade and there has not been another opportunity that has come close to this scale and quality," Stice says.

The recent burst of M&A activity marks a new era for a maturing sector, which is no longer dominated by the motley crew of upstarts that kick-started the shale boom more than a decade ago. And it paves the way for slower growth, as acquisitions by publicly held independents are followed by reduced rig counts, with executives focused on cutting costs and boosting shareholder returns.

Diamondback aims to reduce Endeavor's drilling costs by $150 per lateral foot next year, and also sees scope to extend lateral wells at 150-175 drilling locations when the deal closes. The deal is expected to result in savings of $550mn/yr. "Our shareholders are not paying us for growth these days — they want return of capital," Diamondback chief financial officer Kaes Van't Hof says.

Who's left?

The string of recent shale deals has narrowed remaining options to scale up in the basin, with the exception of Mewbourne Oil and Continental Resources, which are the only remaining private companies with sizeable inventories, consultancy Rystad Energy says. Companies "looking to pay up to enter the upper echelon of inventory holders would need to bundle together smaller operators or merge with other big publicly traded firms", Rystad senior analyst Matthew Bernstein says.

One large independent yet to take part in the current wave of shale consolidation is ConocoPhillips, whose chief executive Ryan Lance has repeatedly made the case for deal-making in the US upstream space in recent years. The company would have to see how any potential deal fits with its 10-year growth plan — as well as how ConocoPhillips could improve the asset in question — before committing, Lance told analysts last week.

While M&A could pick up elsewhere, the latest buying spree is expected to ease after a bumper $192bn in upstream deals last year followed by more than $40bn in transactions so far this year, according to consultancy Enverus. Attention could turn now to non-core asset sales by recent acquirers, with Enverus citing the possibility that Diamondback could put its Delaware assets up for sale and Permian Resources could market its Midland basin position.

By Stephen Cunningham

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