Permian Basin Consolidation as Concho Makes a $9.5b BuyDavid Wagman | March 29, 2018
Concho Resources Inc. is buying RSP Permian in an all-stock deal valued at around $9.5 billion, including RSP’s net debt.
The combined company will run one of the largest drilling programs in the Permian Basin with 27 rigs.
It also will add some 92,000 net acres to Concho’s existing acreage position. The combined position will cover more than 640,000 net acres. In the fourth quarter of 2017, production on RSP’s assets totaled approximately 55.5 thousand barrels of oil equivalent (Boe) per day on a two-stream basis, of which approximately 80 percent was crude oil and 20 percent was natural gas. The transaction adds 2.2 billion Boe of resource potential, of which more than two-thirds is premium resource.
The Energy Department's Energy Information Administration (EIA) expects total U.S. crude oil production to reach an average of 9.9 million b/d, which would surpass the previous record of 9.6 million b/d set in 1970. EIA forecasts that most of the growth will come from tight rock formations within the Permian region in Texas and from the Federal Gulf of Mexico.
The Permian region is expected to produce 2.9 million b/d of crude oil by the end of 2018, about 0.5 million b/d more than the estimated June 2017 production level. That represents nearly 30 percent of total U.S. crude oil production in 2018. The Permian region covers 53 million acres in the Permian Basin of western Texas and southeastern New Mexico.
EIA says that within the Permian Basin are smaller sub-basins such as the Midland Basin and the Delaware Basin, which contain prolific non-tight formations as well as multiple prolific tight formations such as the Wolfcamp, Spraberry and Bone Spring. With the large geographic area of the Permian region and stacked plays, operators can continue to drill through several tight oil layers and increase production even with sustained West Texas Intermediate (WTI) crude oil prices below $50 per barrel, EIA says.
Based on data from Baker Hughes, EIA says that 366 of the 915 onshore rigs in the Lower 48 states as of mid-2017 were operating in the Permian region. EIA forecasts that the Permian’s rig count will grow to 370 by the end of 2018.
In the Permian, operators have been able to maintain positive cash flow because of lower costs, higher productivity, and increased hedging activity by producers, many of whom have sold future production at prices higher than $50/b. EIA says that available cash flows could potentially contribute to the growth of rigs in this region despite relatively flat crude oil prices since December 2016.
Concho Resources says that operational synergies through the deal with RSP may include: asset optimization, directing capital to high-return manufacturing-style projects, and using shared infrastructure systems. The value of corporate and operational synergies is expected to exceed $2 billion.
The deal is expected to be completed in the third quarter of 2018, and is subject to the approval of both Concho and RSP shareholders, regulatory approvals and other customary closing conditions.