Uncertainty challenges Permian Basin’s mergers and acquisitions market

Uncertainty has always been a factor in the oil and gas market, and that factor is being seen in the current mergers and acquisitions market.

“Deals are particularly challenging in the Permian right now because more of the value there tends to be in undeveloped locations that are especially hard to price in this market,” Andrew Dittmar, director at Enverus, told the Reporter-Telegram by email.

That, he continued, contrasts with more mature areas where assets are likely to trade only for the value of existing production and cash flow.

Still, there are deals being attempted, as illustrated by Chevron placing assets in the Southeast Gomez area of Pecos County on the market. The company is also soliciting offers for a co-development opportunity in the Northwest Gomez area. Chevron officials tell the Reporter-Telegram the company regularly reviews its portfolio to ensure it supports long-term business strategies.

Enverus estimated the Southwest Gomez acreage – a 22,124 contiguous net acreage position – could fetch between $100 million and $500 million.

Of the Chevron sale, Dittmar wrote, “it makes perfect strategic sense for Chevron to market an asset that is non-core to its position but could be a valuable addition for a smaller public company or private. I think there is substantial appetite among buyers for these types of opportunities. The challenge, as it has been all year, is the bid/ask spread with the gap between buyer and seller expectations on pricing continuing to bedevil M&A.”

A data room for the Southeast Gomez assets is open, with bids due Nov. 9.

Despite the difficulties, there are also deals being done, as illustrated by Northern Oil and Gas’s $157.5 million acquisition of core northern Delaware Basin properties. The acquisition includes certain non-operated working interests from Alpha Energy Partners. The interests are comprised of 2,800 net acres, 9.6 net producing wells, 2.8 net authorizations for expenditure and wells in process in Eddy and Lea counties, New Mexico and Loving County, Texas.

Tying in with Chevron’s plans to sell assets, Dittmar wrote, “The Permian is indeed still the best place to go shopping if you want to add high-quality inventory and that is what NOG is doing.”

The Minnetonka, Minnesota-based company originally focused on the Williston Basin but has recently expanded into the Marcellus Shale and Permian with a series of acquisitions. 

“After branching out from its Williston Basin roots, the company has repeatedly returned to Permian M&A to both extend its inventory life and increase overall quality,” wrote Dittmar. “We are particularly bullish on the Northern Delaware acreage picked up in its deal with Alpha Energy Partners with new wells on that land, in our view, breaking even at oil prices in the mid-$30s. Quality does come with some cost though, and the deal was a bit more expensive than NOG’s previous acquisitions on a cash flow multiple although still in line with its own stock’s valuation. Additionally, the company included a contingent payment sweetener for the seller linked to oil prices. I think that is a sensible way to bridge the gap between buyers and sellers and could be used more often to help deals transact.”

NOG anticipates $32 million of additional capex over each of the next three years on the Alpha asset.

Mewbourne Oil is the primary operator of the Alpha asset, which also includes approximately 21.2 net undeveloped locations. Other operators include ConocoPhillips Co. and EOG Resources Inc.

The Alpha acquisition follows NOG’s purchase of non-operated Permian properties in Howard County from Laredo Petroleum Inc. in August for $110 million. Also, earlier this year, NOG closed a $406.5 million acquisition of Veritas Energy’s non-operated in the Permian Basin, marking the company’s largest acquisition to date.


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