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Due to the oil price collapse earlier this year, the price for drilling rights in the Permian basin has plunged by 67 percent since 2018, setting the stage for more mergers and acquisitions across the U.S. shale patch, Rystad Energy said in an analysis this week.
The Permian has seen a more significant reduction in valuations per acre than other shale basins, based on historical deal price comparisons, the energy research firm said.
The most recent deals in the Permian were made with little to no acquisition premiums, with an average price of about US$24,000 per acre. This is a massive 67-percent plunge compared to deals back in 2018, when the sale of RSP Permian and BHP’s Permian portfolio fetched more than US$70,000 per acre, according to Rystad Energy’s estimates.
Across all shale basins, the average price for acreage has plummeted to US$5,000 per acre in 2020 from US$17,000 per acre in 2018.
“The reduction in valuations is promoting consolidation that wouldn’t have happened in 2018-2019. Low equity prices and the need for investor support is motivating many operators to look for new options to merge, especially if it doesn’t involve heavy debt and cash,” Alisa Lukash, Senior Analyst at Rystad Energy, said.
After historically low number and value of deals earlier this year, M&A activity picked up pace after companies shook off the shock from the fastest slump in oil prices in recent memory.
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Chevron acquired Noble Energy in the first major post-COVID deal. Devon Energy and WPX Energy announced their merger in September. ConocoPhillips announced that it was buying Permian-focused Concho Resources in an all-stock deal valued at US$9.7 billion. A day later, Pioneer Natural Resources said it would buy Parsley Energy in an all-stock transaction valued at US$7.6 billion, including Parsley’s debt.
Analysts expect more deals in the shale patch in the near future, but they warn that buyers are very picky in selecting acquisition targets as they look to buy top quality assets.
According to Rystad Energy, the average industry-wide drilling and completions (D&C) costs could drop by up to 5 percent in 2021, thanks to an increased pace of consolidation, greater standardization, and lower service costs. More capital is set to flow to prime acreage in the Permian, ultimately pushing the P50 breakeven price in the basin down toward $20 per barrel, the research company says.
By Tsvetana Paraskova for Oilprice.com
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Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews.