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Concho buyout biggest in Permian’s history

 

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Pumpjacks operate on oil wells in the Permian Basin in this aerial photograph taken over Crane, Texas. (Daniel Acker/Bloomberg)

Concho Resources’ chief executive is trumpeting his $8 billion acquisition in the Permian shale basin as a “road map” for consolidation in America’s hottest drilling play — the lucrative region that sprawls across eastern New Mexico and West Texas.

The buyout of rival RSP Permian in an all-stock deal announced Wednesday would create the basin’s biggest producer, at a time when the industry is moving toward ever-larger, more complex operations to supersize the shale boom. It also marks the biggest in the history of the Permian, the area that’s at the heart of the U.S. drilling renaissance.

It immediately stoked speculation about who might be bought next.

Despite the hefty premium attached to the deal, Concho CEO Tim Leach said he saw no drop-off in interest for other acquirers in the region.

“This is a road map for in-basin consolidation,” said the CEO, who founded his first company in the Permian 21 years ago. “I see the Permian getting more efficient, not less efficient, as we do these full-scale developments. The attraction in our industry to the Permian will just continue to grow.”

Among Permian deals, the purchase would top Exxon Mobil Inc.’s acquisition of assets from the Bass family for as much as $6.5 billion last year and Encana Corp.’s purchase of Athlon Energy Inc. for $7.1 billion in 2014.

The purchase price, which JPMorgan Chase & Co. estimated at $82,000 per acre, appeared to generate some heartburn for Concho investors, however. The Midland, Texas-based company fell as much as 10 percent in New York trading, their worst intraday performance in almost eight months.

The deal is expected to close by September.

Leach said the deal was justified by the “underlying economics of the wells.” RSP has large blocks of acreage, much of it contiguous to Concho’s holdings, allowing for more efficient drilling. The company also has a history of top execution that will make its holdings even more valuable, he said.

For the last couple of years, oil executives have talked about the need for mergers in the region, historically dominated by medium-size companies rather than giants like Exxon or Chevron Corp.

Creating super-sized shale producers could reduce operating costs as the techniques used to squeeze oil from shale rock become more capital intensive. For example, companies are drilling long horizontal wells as long as 10,000 feet, often straddling acreage owned by several operators.

Concho pumped the equivalent of 193,000 barrels a day last year, while RSP produced 55,000 barrels a day, according to the companies’ annual accounts. Concho said the combination will create the largest crude oil and natural gas producer from unconventional shale in the Permian.

“The deal has the potential to spark an arms race in the region,” said Roy Martin, senior analyst at consultant Wood Mackenzie in London. “It’s going to send a shiver down the spines of other companies.”

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