The best accessible upstream growth opportunity in fifty years? US tight oil. Correction: the Permian Basin. Second correction: the Wolfcamp formation spread across the Delaware and Midland sub-basins.
It’s this play that drives most of the growth in tight oil, from 5 million b/d today to the 10 million b/d we forecast in the middle of next decade. No surprise then, that those already big in the play want more of it.
But does Concho Resources’ acquisition of RSP Permian for US$9.5 billion – the biggest deal yet – signal the start of Permian consolidation? I caught up with Ben Shattuck, Research Director, US Lower 48.
Q. Ben, is Concho doubling up on what it does best?
That’s the obvious answer. Merging two Permian tight oil specialists brings scale (the largest rig program in the Basin) and synergies that Concho estimates at US$2 billion. That’s a very ambitious target in our view to be extracted from rationalising central costs, high grading drilling inventory and leveraging technical expertise, such as longer laterals from larger pads.
Q. I thought operators were focused on value, not volume?
It’s against the trend of capital discipline that has been driven by investors in the last year. But Concho has a history of deal-making and this is an all-share deal. By using its higher-rated equity to buy the lower-rated RSP, the deal is balance-sheet neutral for Concho and, in the company’s view, earnings accretive. Concho will argue the deal is about value and volume.
Q. What are the risks in scaling up?
The Permian’s on fire right now, and Concho reckons the deal enhances its three-year outlook for production growth. RSP brings elite exposure to Midland/Delaware sweet spots, so Concho’s growth through 2020 is likely more robust. Less certain is what lies beyond – how the Permian plays out into next decade.