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IHS: Economics, Productivity Make Permian Ripe For Consolidation

The Permian Basin's maturation as an unconventional liquids play has made it a premium spot for producers -- particularly since oil prices have been crushed and are expected to remain so for a while. Now, consolidation of assets and players is afoot as the upstream industry works through its glut of debt and oil.

The Permian Basin is the only U.S. unconventional liquids resource seeing significant year-over year, per-well productivity gains, according to consultancy IHS. The IHS Energy North America Supply Analytics report titled "The Permian Basin -- Need for Improved Economics and Opportunities Drive Consolidation," says peak productivity in the Permian has improved by more than 40% since third quarter 2014, led primarily by the Bone Spring play. This performance has not gone unnoticed by either operators or the markets, the IHS report noted, with the markets showing a preference for Permian deals. In 2015, more than 35% of deals were focused on the Permian.

"More than 1,000 operators have generated new volumes from the Permian since January 2014, but just 10 operators are responsible for more than 50% of the combined liquids production in the play," said Reed Olmstead, senior manager -- North America supply analytics service at IHS Energy.

"At the other end of the spectrum, more than 650 operators are generating less than 3,000 b/d in the play. Due to the performance of the play and the interest and activity in it, IHS expects consolidation to increase in the play before the second half of 2016, and that consolidation in the Permian will occur at a greater rate than in other domestic plays. Operators are looking to focus their money on areas that can generate economic returns at depressed oil prices, and the Permian keeps rising to the top when you look at cost and performance. Permian deals skyrocketed in 2015, passing all other plays."

Jerry Eumont, managing director, North America supply analytics service at IHS Energy and a co-author of the analysis, told NGI's Shale Daily that many in the industry thought consolidation would have picked up more in the latter half of 2015, but there hasn't been as much as everybody expected. "But I think the lower prices that we're seeing now are going to increase the likelihood and probably the amount of consolidation we have," he said. "Some of it's going to be forced, where companies are going to be bankrupt and they're going to have to sell, and you're going to have others trying to pick up areas of growth that they think maybe they can pick up in a cheaper way."

The thinking at IHS is that the acquirers for the most part will be independents rather than the majors. Better performers in the basin such as Cimarex Energy Co. and Concho Resources Inc. are likely candidates to be buyers, he said, also Devon Energy Corp. and Anadarko Petroleum Corp. Some potential buyers have been rumored to be takeout targets themselves, he added.

Considering all Permian deals, the Midland Basin of the Permian has seen slightly higher 1P reserve valuations recently, bringing the play average up from $13 per 1P (proven) boe of reserve to nearly $18. By contrast, the IHS report said, Eagle Ford 1P reserves have seen recent valuations closer to $15 per boe. The "Permian Premium" indicates the upside expected from the play, as productivity continues to increase.

"Premiums do not appear to have topped out, meaning companies looking to do business in the basin may pay even higher prices in the future," Olmstead said.

The result of increasing consolidation in the play, he said, will be a net reduction in capital spent, but higher productivity levels, as remaining operators will be able to achieve greater capital efficiencies. Additionally, individual operators will have more acreage for high-grading opportunities and will employ cost efficiencies across a greater inventory of new wells, generating improved returns.

"Generally speaking, smaller operators have more challenged economics than larger operators, largely due to the ability of larger operators to leverage operational and cost efficiencies across a greater acreage and production base," Eumont said. "We anticipate that much of the activity in the coming months will be driven by operators of all sizes, who are already operating in the basin, but focused on leveraging acquisition attempts for a variety of strategic purposes."

Apache, the IHS report said, continues its transition to focusing more on Permian unconventionals, while Pioneer splits its focus on its Permian and Eagle Ford assets. However, on Tuesday Pioneer said it will be dialing down Eagle Ford activity while it continues its focus on the Permian, specifically the Spraberry/Wolfcamp (see Shale DailyJan. 6).

Devon Energy, despite its position in the Barnett and Eagle Ford, promotes activity in the Permian, though with below-average productivity, IHS said. With the sustained drop in oil prices, operators with a greater presence in the basin appear poised to acquire smaller, pure-play operators, the IHS report said, but IHS also expects new entrants to be active.

More than 185,000 wells produce from the Permian basin, according to IHS, with nearly 18,000 horizontal wells. "The Permian Basin covers a vast geographic footprint; however, the large number of well bores leads to few, if any, truly new production bases," Eumont said. "With so little acreage not held by production, any operator looking to enter the basin will have but one method to execute that strategy: acquisition. But they may not want to wait long, since premiums do not appear to have topped out, which means companies looking to do business in the basin may pay even higher prices in the future."

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