Follow The Big Money In The Shale Patch

This last week, we'd have to say that many of the mini-majors, as well as one mega-major, just ran out of patience with this oil market. Just as the Saudis threw in the towel on glutting a market and waiting for US independents to crack, opting for a production agreement, so did some key oil companies here in the US give up on waiting for a greater value, convinced that the oil markets are headed steadily higher from here.

And one theme recurs through it all: Permian basin shale oil.

First, Exxon-Mobil's (XOM) major move of buying up the privately owned Bass family acreage for $6.6 billion. This will be the last deal for CEO Rex Tillerson as he moves on to Washington, and he'll certainly hope this one creates a better legacy than his deal for XTO energy in 2010. It's as focused as the XTO was, in the hottest US shale play of the Permian, with an estimated 60 billion barrels of oil in reserves from 275,000 acres.

Noble Energy (NBL) acquired the Permian assets from Clayton Williams (CWEI), which has been by far the hottest oil stock of the last year. After trading in single digits in the spring of 2016, CWEI has steadily risen to above $100 a share - only to add another almost 50% premium with the Noble deal.

Finally, we saw the sale of Anadarko's (APC) Eagle Ford acreage for $2.3b to Sanchez Energy (SN). This deal is particularly interesting when we look at the additional sale of Marcellus natural gas acreage that Anadarko also recently to Alta Resources for $1.2b.

So, two questions arise: What does the Anadarko sale have to do with the Permian, and what do these three deals mean for us?

In context, the Anadarko deal is decidedly about the Permian acreage that they already hold. Anadarko has been working almost frantically in focusing their production efforts in only two places; the Gulf of Mexico and the Permian. In the Gulf, they made another big deal with Freeport-McMoRan (FCX) for offshore assets in September for $2b. In this new age of lowered capital spending and limited drilling resources, everyone is feeling the need to strongly consolidate. For Anadarko, the move away from the Marcellus and Eagle Ford is truly all about maximizing their opportunity in the Permian.

Noble also is looking for a foothold in this hottest of shale plays, and for Exxon, they have been looking for a big buy in the shale space since the deleveraging in smaller shale producers began in early 2015. As Tillerson goes out the door, it's clear their patience has been spent. While they seemed to wait until the last moment, it's not surprising that they spent big in the Permian.

The easy argument that many analysts will make is that the enthusiasm for Permian assets is way overwrought - Exxon claims that Bass acreage has 60 billion barrels of reserves, yet only 3.4b barrels are currently recoverable. Noble paid a huge premium for Clayton Williams, despite the stock already notching a ten-bagger over the last year in price. And Anadarko sold Eagle Ford acreage at an average of $7.67 per barrel of oil equivalent in reserves, well below contemporary deals that valued acreage above $12 per barrel.

I don't care about any of that.

Having traded for 35 years, I'll tell you that it's often only important to see where the big money is moving, and the money is definitely flowing heavily into the Permian. And while there's undoubtedly money to be made in other plays as well, you just don't want to entirely shut out from where the action is likely to be hottest.

All that to say that you've got to find quality Permian players to put a nice chunk of your energy portfolio to work with - now. Two of the best (besides Anadarko) I have already given you - Cimarex Energy (XEC) and Centennial Resources (CDEV) which we got after the Mark Papa SPAC, Silver Run, bought in.

The majors and mini-majors have run out of patience. You should be at the end of yours too. If you don't already have some Permian stocks in your portfolio, despite their high premium, I believe you should add some.