Who needs to beef up Permian tight oil exposure?

The challenge is always to present a complex story simply. Every once in a while, a visual aid nails it and the reader frankly doesn’t need much more. In this particular case, it’s about what will drive tight oil consolidation in 2019 and beyond. More on this shortly.

(Scroll down for the chart, pre-drill well inventory analysis as a guide to future Permian consolidation.)

US tight oil has been the biggest theme in the upstream M&A market over the last three years. A total of US$60 billion was spent acquiring tight oil assets in 2018, of which almost 50% was in the Permian. A clear pattern has emerged since 2015 – it’s the big players dominating the tight oil deal making. Smaller independents valued at under U$$5 billion are still active, but there is a changing of the guard.

The big money is coming from Big Oil

That's Majors and large independents. Over two-thirds of the capital spent buying tight oil assets in 2018 was from companies with a market value of more than US$5 billion. Nearly half was companies of US$10 billion or more, including BP, which acquired BHP’s assets.

This reflects the industrialisation of development in the Permian. ExxonMobil, Chevron, Shell and now BP are among the biggest investors shaping the way the basin is being exploited. Scale is a means of creating value – access to a bigger inventory of pre-drill wells, especially in contiguous acreage. High grading inventory and selecting well sites are key to the logic of doing deals.

Where next for tight oil consolidation?

There are those who don’t have exposure but who want to get it. There are plenty of these ‘have nots’ – many of them sizeable players, including Asian NOCs, Asian independents and, perhaps, even Majors like Total. Not all may want to buy big, but some want in on the action – as a platform to build an understanding of what’s going on, how it all works, and as a spring board for future expansion.

Then there’s a bigger group of Permian ‘haves’, some of whom may not have enough. That brings us back to our visual, shown below, which ranks existing positions in the Permian – who needs to buy and who may consider selling out.

With a blockbuster year in Lower 48 M&A, investors and operators are asking what's next. There is no reason the spotlight should shift away from the Permian in 2019. Some tight oil headwinds will only get stronger, but other issues will find solutions. In this insight, US Lower 48: 4 things to look for in 2019, we highlight four things to look out for next year including Permian productivity, infrastructure constraints, water handling solutions, and in-basin sand trends.

Where's the data?

Ryan Duman, Principal Analyst, and team mined our US L48 database of companies’ exposure to the basin, making a judgement on the depth and quality of portfolios by ranking metrics such as production growth, experience, productivity, variability, capital efficiency, asset size and location. By combining historical actuals and forward-looking metrics we’re able to take a more holistic review of how each operator stacks up.

Three things stood out

First, few Permian operators have enough high-quality inventory to support growth much beyond five years (and many production profiles start plateauing sooner than that). We found that approximately 60% of Permian operators could be considered as either future buyers or sellers.

Second, some candidates stand out as the potential buyers that might lead another wave of acquisitions. These may be operators looking to the Permian for significant growth and more productive inventory, among them Anadarko and Devon. Soaring Permian acreage costs means the likely buyers’ club will be a tight-ish group, including the larger independents and Majors. Capital discipline will be a limiting factor industry-wide.

Third, companies with 'less certain longevity' might choose to sell while the going's good. An example of this visual in action is Resolute's sale to Cimarex late last year, announced shortly after we first published the analysis. Others might opt to improve their position – if they have organic upside potential from exploration and appraisal – or shift to industrialised development. Operators like QEP and Encana are actively testing cube- or tank-style development, which could help them exploit Permian resource more efficiently and effectively.

We may be in for a fresh bout of consolidation. The recent sharp sell-off in shares has opened up steep discounts to our valuation for some independents, an opportunity for the big to get bigger.