Aug. 14–The booming Permian Basin just keeps booming.
The Midland oil producer Diamondback Energy said Tuesday that it will pay $8.4 billion to buy a rival company and about 150,000 acres of Permian land, Diamondback’s second big deal in a week and the third $1 billion-plus acquisition in the West Texas shale play in less than a month. And these might only be the beginning of new wave of consolidation in the nation’s most prolific source of oil.
With most of the best acreage already spoken for, the only option for companies looking to enter or expand in Permian is to buy up other firms. Big Oil companies and several of the bigger independents, such as Diamondback of Midland, are trying to stake out the best and biggest positions in the Permian, which accounts for almost one-third of the nation’s record crude production.
“There’s only so much five-star rock in the U.S. in a jurisdiction that encourages you to drill it,” said Ethan Bellamy, an energy analyst at Robert W. Baird & Co. in Houston, referring to the dense shale rock that holds oil and gas. “That’s the Permian.”
Diamondback, which trades under the stock ticker “FANG,” is buying the Alabama oil producer Energen Corp. which, like Diamondback, operates exclusively in the Permian. The all-stock deal comes just a week after Diamondback agreed to buy out Houston-based Ajax Resources, another Permian player, for $1.2 billion. The two acquisitions would nearly double Diamondback’s Permian holdings to 390,000 net acres, from 211,000.
The deal-making is part of the industry’s drive for efficiency, Bellamy said. Putting together large, contiguous tracks that allow companies to drill long horizontal wells, and several from a single location, is a way to low overall costs per barrel of oil.
Earlier this year, Midland-based Concho Resources paid $8 billion to buy RSP Permian of Dallas. And, in late July, The British oil major BP made agreed to pay $10.5 billion for the Texas assets — including a large Permian position — of BHP Billiton, an Australian mining conglomerate that decided to pull out of the U.S. oil business.
Diamondback’s latest acquisition came after Energen put itself up for sale, under pressure from activist investors such as Keith Meister of Corvex Management and famed corporate raider Carl Icahn, who argued shareholders would benefit from selling at a premium in the red-hot Permian.
Diamondback Chief Executive Travis Stice and his management team and board will run the company, but Energen shareholders will own about 38 percent of the expanded company. Diamondback also is assuming Energen’s debt load of about $830 million. The deal is expected to close by the end of the year.
“This transaction represents a transformational moment for both Diamondback and Energen shareholders,” Stice said.
Although oil production volumes in the Permian are showing signs of flattening because of pipeline shortages, the growth is expected to pick back up again around the middle of next year as pipelines under construction come online. Companies are racing to build out the pipelines that will carry oil from the Permian to port and refining hubs near Houston and Corpus Christi.
That’s all contributing to an oil export surge from the Houston area. About 75 percent of U.S. crude exports come from the Texas Gulf Coast. In addition to port expansion projects, companies such as Houston’sEnterprise Products Partners and global commodities trader Trafigura are proposing crude oil exporting terminals off the Texas Gulf Coast to more easily accommodate the largest oil tankers.
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