The Occidental-Anadarko deal no longer dominates the news headlines, but that hasn’t diminished the speculation about the next Permian deal. We asked two of our expert analysts to use the DI Dealmaker Suite to examine 20 E&P Permian pure players based on how they’re valued on a dollar/acre basis, and compare those valuations to the surge of Permian A&D deals that occurred between 2016-2018. They identified trends that are very useful for your research into potential future Permian M&A activity.
Andrew Dittmar, a Senior M&A Analyst on the Drillinginfo Market Research Team, and Tyler Krolczyk, a Petroleum Engineer and Technical Advisor on the Drillinginfo Consulting Services Team, pulled all the data from the DI Market Research Database for, “Where do the Major Permian Players Stand after the Anadarko Acquisition?” a webinar they presented on June 11, 2019.
The replay is available here.
Let’s look at a few of the key takeaways, and share answers to some excellent questions Andrew and Tyler received from many of the nearly 150 attendees.
How Permian Pure-Play E&Ps Stack Up
Andrew began by explaining their methodology for developing the report on 20 E&Ps that are entirely or primarily focused on the Midland and Delaware Basins. Production value is based on 1Q19 volumes and Drillinginfo multiples of $45,000/daily bbl for oil, $20,000/daily bbl for
NGLs, and $2,250/daily Mcf for gas. They made additional adjustments as needed for pro-forma M&A, non-Permian acreage, mineral ownership, and midstream assets.
The last 12 months have not been kind to any of the companies’ share prices. You can see in the graph below,the S&P 500 (red line) has been relatively stable over this time frame and outperformed the XOP index (blue line). Diamondback (green line) has been the top performer, a bit below the S&P and well ahead of the E&P index. Parsley (yellow line) has been in step with the E&P index, and Centennial (orange line), which performed so well in fall 2018, experienced a significant drop, particularly when the calendar flipped to 2019.
Looking at estimated value by production and acreage, the “Big 3” – Diamondback, Concho, and Pioneer – stand out. They each command a premium valuation vs. their peers, trading at an average $21,000/acre and 6.3×2019 earnings before interest, tax, depreciation, and amortization (EBITDA). Both Concho’s and Pioneer’s acreage values account for more than half of their total EV at $13 billion each. Diamondback has the highest dollar/acre value at $22,600, but holds fewer total acres.
When we add Parsley and Callon to the Big 3, we see five companies trading at 5.8X EBITDA vs. 4.2 to the rest of their peers. However, this doesn’t mean they’re more likely than other players to strike a deal.
Concho and Diamondback are still digesting the deals they made in 2018. Pioneer’s management has made it clear they’re happy with their acreage position, and Pioneer hasn’t traditionally been a deal-making company. However, these companies’ positions do present opportunities for accretive acquisitions by leveraging their higher valuations to acquire a company trading at a lower valuation.
This wasn’t the only time Pioneer’s name came up…
The large caps and majors command the vast majority of Tier 1 acreage positions in the Delaware and Midland Basins. Look at the percentage of acreage positions that fall into Drillinginfo’s Tier 1 classification to see how well positioned the larger companies are relative to their peers.
One audience member asked, “Do any of the small cap E&Ps like AXAS or ROSE, who are trading at PDP value, actually have top tier acreage positions?” Today, the small cap companies do not have the acreage quality of the bigger operators, but their positions do vary. For instance, Lillis has a great position with all Tier 1 positions.
What About the Non-Permian Pure Players?
A number of attendees asked whether we expect a non-Permian pure player to make a deal that will enable it to become a pure player. That’s certainly possible – Abraxas, Carizzo Energy, and SM Energy are three E&Ps with Eagle Ford assets who could benefit from a transition to full Permian pure play.
Of those three, Carizzo has the strongest position in the southern Delaware Basin, although when we zoom in on the map to focus on the core Delaware Basin fairway, you see how dominant the majors (along with EOG Resources) are.
Note that you can use the Drillinginfo desktop AND mobile app platforms to create maps like the ones above, and then overlay them to help make your own research faster and more informative.
The non-pure players all face the same challenge of realizing full value for the assets they would sell off. Recall that Pioneer struggled somewhat to get out of its Eagle Ford position, but was able to accept contingent payments in the future. It had that luxury due to its extremely strong balance sheet, but the other companies we’ve highlighted here would need to get more value for their non-Permian assets before even considering deals that would enable them to become pure plays.
Major Players Likely to Stay Put
The larger operators do not have need for M&A as they have plenty of inventory. Take a look at this side-by-side comparison of the large caps’ overall footprint vs. the midcap acreage positions. If you piece just two or three mid caps together, you can easily build a Diamondback-looking acreage position.
This is when Pioneer’s name came up again.
About 50 percent of Pioneer’s acreage is Tier 1 vs. the Midland average of 20 percent. Pioneer is outperforming the other mid caps because of how well it has positioned assets, and that’s why it has a premium valuation.
Sixty-three percent of Pioneer’s acreage breakeven is under $45 WTI, and although we are bearish on the Midland Basin compared to the Delaware Basin, Pioneer ranks third with premium valuations of both basins.
Tyler used Drillinginfo’s Creaming Curve creation solution and discovered Pioneer performs in the top 10 percent of operators across all zones, dominating in smaller areas.
This analysis enabled Tyler and Andrew to answer the most common question they fielded from attendees, “What is more likely to consolidate, large caps or mid caps?”
Again, the larger operators do not have need for M&A, and won’t make a deal unless they find themselves in a position where they cannot pass on the opportunity (see: Occidental-Anadarko).
However, on the mid cap side, if you imagine combining 50,000 acres here with another 50,000 there, you start to see how one company could build a 200,000+ acre position that resembles what Diamondback has with its 300,000 acres.
These are just a few of the key takeaways Andrew and Tyler presented. To listen to the webinar and view the entire presentation, follow this link.