Delaware appeal may revive Permian M&A prospects

The 2020-21 surge of Permian basin mergers did not take all the life out of M&amp;A in the region, as one sub-basin — the Delaware — may be primed for more activity.

Relative to other parts of the Permian such as the Midland basin, the fragmented nature of ownership in the Delaware — with smaller public explorers looking to scale up and private equity searching for an exit — suggests more tie-ups could be on the way. At the same time, privately held operators are set to help drive output from the Delaware — located in far west Texas and southeastern New Mexico — to a record high this year, according to consultancy Rystad Energy.

A recent $7bn merger of equals between Centennial Resource Development and privately held Colgate Energy Partners could be a harbinger of further deals to come as publicly traded companies seek to extend their inventory of acreage. "Longer term, we do have more of these types of deals," consultancy Enverus' director Andrew Dittmar predicts. "The small and medium-sized public companies need to get inventory — a lot of them are short — and they need cash flows not just for three or five years, but 10 plus years."

Shale deals have been few and far between this year as oil prices surged in response to the Russian invasion of Ukraine, creating a mismatch between sellers' expectations and what buyers are willing to pay. That followed a spate of deals coming out of the pandemic as companies sought to bulk up and trim costs. But mergers such as the Colgate deal offer advantages in helping to build scale, especially in an inflationary environment, and bigger names are more likely to attract the generalist investors that are slowly coming back into the space.

Centennial more than doubled its production and acreage through the merger with Colgate, creating what will be the "largest pure-play E&amp;P company" in the Delaware basin, according to Centennial chief executive Sean Smith. The company will have total production of about 135,000 b/d of oil equivalent (boe/d), and around 180,000 net acres. The transaction, which is expected to close in the second half of the year, values Colgate at about $3.9bn and comprises 269.3mn Centennial shares and $525mn in cash. It also includes $1.4bn of Colgate's net debt.

The relatively low valuation in the Colgate deal suggests there was little appetite among other public companies to offer more, according to analysts at KeyBanc Capital Markets. "Commodity prices are high, so most publics don't want to buy stuff near the potential top of the cycle," they said.

Privates on parade The deal comes as total hydrocarbon output from the Delaware is forecast to soar to an all-time high of 5.7mn boe/d in 2022, according to Rystad. Production is set to increase by 990,000 boe/d, of which almost half is new oil production, the consultancy says. "The Permian Delaware has emerged as the top oil-producing play in the US shale patch, outpacing growth in other oil-rich regions," Rystad Energy vice-president Veronika Meyer says. "With oil prices expected to remain elevated, 2022 promises to be another outstanding year for production growth."

Investment in the basin is expected to surge by more than 40pc this year to $25.7bn, with notable contributions from ExxonMobil, Chevron and ConocoPhillips. The biggest producers are forecast to boost investment by 60pc to $7.4bn, while the share of private operators will increase by 50pc to almost $9bn. Inflation will also partly contribute to the higher spending. With many public independents sticking to a script of favouring investor returns over production growth, private companies have been faster to react to oil prices trading at over $100/bl. They more than doubled their collective rig count in the basin to 73 in April from 30 at the beginning of 2021, Rystad research shows.

By Stephen Cunningham

Permian Delaware production growth

Permian Delaware spudded wells

Investments by company type

Related News