Energy Pulse: in brief (7 July)
4 minute read
While Ed Crooks is taking a well-deserved break we bring you news and views in brief from some of our global energy specialists.
This week, we look at Denbury’s carbon capture, utilisation and storage (CCUS) expansion, ExxonMobil’s latest venture into the lithium sector and Permian M&A and inventory demand.
Denbury's CCUS business expands with two new deals
Denbury has announced the addition of two new CO2 sequestration sites with 300 million tonnes of CO2 storage capacity. The company’s portfolio now includes 10 sites across five states, with approximately 2 billion tonnes of CO2 storage space.
In one deal, Denbury has formed a 50/50 joint venture partnership with Lapis Energy, a full-service CCS partner that holds a lease for 14,000 acres in St. Charles Parish, Louisiana. The second deal was with Soterra (a subsidiary of Greif, Inc) to develop 8,500 acres in St. Helena Parish, Louisiana which is less than five miles from Denbury’s existing North East Jackson Dome (NEJD) CO2 pipeline.
The pace of Denbury’s CCUS portfolio expansion is staggering. Six of its ten sites have been finalized since December 2022 and they are strategically located near industrial hubs with high emissions. Leveraging its 1,300 miles of dedicated CO2 pipelines, Denbury is partnering to optimise vertical integration of CO2 transport and sequestration. The industry is watching Denbury, Talos, and other early leaders in the CCUS sector. Success will depend on their ability to scale up operations, attract investment, navigate regulatory and government policies and effectively gauge market demand.
ExxonMobil expands lithium plans
ExxonMobil subsidiary Saltwerx has partnered with Tetra Technologies to develop a 6,100-acre lithium extraction project in southern Arkansas. ExxonMobil acquired Saltwerx earlier this year from Galvanic Energy when it bought drilling rights for 120,000 acres in southern Arkansas for US$100 million.
Saltwerx will contribute 2,000 acres to the partnership and Tetra, a chemical producer that specialises in water treatment and recycling, will contribute 4,100 acres. The partners will leverage direct lithium extraction (DLE) technology that selectively removes lithium ions from brine where it can then be processed into battery-grade material.
The project will focus on lithium extraction from the Smackover Formation, the world’s largest source of bromine supplying 40% of the world’s bromine production. The partners will file an amended application in Arkansas to develop the brine deposits later this year.
This marks ExxonMobil's second venture into the lithium sector this year. With the US government's goal of ending fossil fuel vehicle purchases by 2035, lithium extraction presents a valuable opportunity to extract additional value from traditional oil and gas production while simultaneously boosting critical metals production. The abundance of oil field brines provides ExxonMobil with a unique chance to leverage its existing production, facilitating a smoother transition into the lithium market.
Permian M&A and inventory demand: June transactions reveal a shift
Over the last nine months we’ve seen seven deals involving private to public exits. Diamondback, Ovintiv, Callon, Vital, Earthstone and Civitas combined for Permian transactions summing US$14.6 billion and 287,000 boe/d. Some deal announcements have involved clear-cut inventory counts – examples being Diamondback’s two purchases late last year. The company added roughly 50,000 boe/d to their 2023 production and over 500 future drilling locations (reported) for approximately US$3.2 billion. Management commentary led with inventory discussion.
Our team’s been asked numerous times of late, “Are buyers paying for inventory?” M&A metrics – producing well (PDP) vs undrilled wells (PUD) value splits – suggest this was clearly the case with Diamondback. Via WoodMac asset models, roughly 50% of the company’s deal value late last year went toward undrilled locations. But what about other buyers and is there a trend or clustering effect emerging?
As we’ve progressed through 2023, softening WTI has also been followed by less deal value ascribed to tight oil well inventory. Flipped on its head, PDP as a percentage of transaction value increased as commodity prices fell. Ovintiv’s April 2023 acquisition of three Encap-backed portfolio companies added 75,000 boe/d and a reported 1,050 future locations for US$4.2 billion. WoodMac models attribute 67% of that value to PDP. Vital’s acquisition of Forge (9,500 boe/d and 100 future locations) was in line with OVV’s deal, with 65% of deal value in PDP.
June transactions revealed another shift as Earthstone and Civitas placed even more value on PDP. We might suggest this is more than just a softening oil price and defensive story though. Some buyers have been clear in their strategic drivers for asset purchases. In multiple instances, deals are to build materiality and diversification today rather than tack on inventory for next decade.
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