Diamondback Deal Tips Continued Permian Consolidation

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Diamondback Energy’s $1.5 billion Permian Basin acquisition last week serves as a reminder that consolidation is expected to continue in US shale as producers vie for access to an ever-shrinking pie of top-tier assets.

Diamondback’s agreed deal for private operator Lario Permian is the E&P’s second such move in as many months and brings its Permian acquisition spending spree to over $4.2 billion since the start of 2020, according to an Energy Intelligence analysis of Enverus M&A data.

That puts it third among Permian upstream consolidators over that period, behind only ConocoPhillips ($22.8 billion) and Pioneer Natural Resources ($14 billion).

Keep On Consolidating

Energy Intelligence has flagged since the 2020 downturn that M&A would likely be a steady feature in the US shale patch in the coming years. That trend has borne fruit, albeit in fits and starts.

Put simply, larger companies are generally better suited to navigate a world with less available external capital, investor demands for rigorous balance sheet discipline and robust returns, and the challenges of managing high decline rates and depleted drilling inventories in a capital-efficient manner.

Those benefits have driven even large Permian producers like Pioneer and Diamondback to take the M&A plunge. Permian assets have either been the focus or at least a piece of the seven largest US upstream transactions since the start of 2020, Enverus data shows. Five producers now count on the Permian to deliver more than 500,000 barrels of oil equivalent per day, largely on the back of M&A-infused expansions.

More recent Permian M&A activity has seen smaller players seek out the benefits of greater scale as well, even if “needle-moving” acquisitions are a different order of magnitude for them than the US upstream giants. Earthstone Energy, for example, has penned several major acquisitions this year that will help nearly quadruple its production profile to around 92,000 boe/d.

Inventory Pressure

Augmenting drilling inventory depth and health has been a standout characteristic of the Permian’s latest deals, for large and small cap producers alike.

Even companies that boast robust runways of higher return drilling locations are keeping a careful eye on their continued access to prime locations in order to support promised financial and shareholder returns for years to come. Navigating those goals in a high cost inflation environment — for which the Permian is currently the industry poster child — only accentuates the need for proactive management.

It is therefore telling that Diamondback flagged Lario’s 130-plus net drilling locations that can compete for capital “immediately” as the top-line driver for that deal. Diamondback will drop a rig on the acreage to better pace the development of the additional acreage for its long-term needs.

Similarly, Northern Oil & Gas, one of the Permian’s busiest consolidators in recent months, has consistently heralded the lower-cost, higher oil-weighted inventory its deals have captured — with many offering additional “unbooked” inventory prospects later down the road.

Mike Oestmann, CEO at Warburg Pincus-backed Tall City Exploration, told Energy Intelligence recently that he sees such inventory calculations driving more M&A in the Permian, particularly with private producers in the crosshairs.

“With one rig, we'll drill about, for round numbers, about 15 wells per year … [giving us] 20 years of inventory in our company. And I think a lot of other privates do too,” Oestmann explained. “So I think that makes private companies an attractive target [for public producers] if they have a large inventory of quality wells.”

Capturing this heightened emphasis on inventories in M&A, Oestemann shared an observation on Diamondback CEO Travis Stice in the wake of Diamondback’s $1.6 billion acquisition last month: “Did you notice the first thing [Stice] was quoted as saying: ‘It brings us lots of inventory?' Normally, they talked about some kind of [financially] accretive metric. This time, he talked immediately about inventory. And so I think that kind of proves my point.”

Key Permian Consolidation Deals, 2020-YTD 2022
Date AnnouncedDealTransaction Value ($mn)
Jun'22APA acquires Delaware Basin assets from Titus Oil & Gas$505 
Aug'21Callon acquires Delaware pure-play Primexx788 
Jun'21Colgate acquires Luxe --
Jun'21Colgate acquires Southern Delaware Basin assets from Oxy508 
Nov'21Colgate bolts on Northern Delaware Basin assets from Oxy190 
May'22Centennial and Colgate combine in a merger of equals, becomes Permian Resources3,942 
Oct'20ConocoPhillips acquires Concho in an all-stock deal13,337 
Sep'21ConocoPhillips acquires Shell's Delaware Basin assets9,500 
Nov'21Continental acquires Pioneer's Delaware Basin assets3,250 
Mar'22Continental bolts on Delaware Basin assets from Chevron200 
Dec'20Diamondback acquires Guidon 862 
Jan'22Diamondback acquires Ward County assets from Colgate 230 
Oct'22Diamondback bolts on Midland Basin assets via FireBird acquisition1,592 
Nov'22Diamondback acquires Midland Basin player Lario Permian1,548 
Dec'20Earthstone acquires Midland Basin producer Independence Resources Management188 
Apr'21Earthstone acquires Midland Basin assets from Tracker Resource Development III, Sequel126 
Oct'21Earthstone bolts on Southern Midland Basin assets from Foreland Operating, BCC-Foreland73 
Dec'21Earthstone acquires Northern Delaware Basin assets from Chisholm 604 
Jan'22Earthstone acquires Midland Basin assets from Bighorn Permian Resources860 
Jun'22Earthstone acquires Northern Delaware Basin assets from Titus Oil & Gas627 
May'21Laredo acquires Midland Basin assets from Sabalo Energy, Shad Permian718 
Sep'21Laredo acquires Midland Basin assets from Pioneer229 
Jun'21NOG bolts on Delaware Basin assets from CM Resources, others102 
Nov'21NOG acquires Permian Basin assets from Veritas407 
Aug'22NOG bolts on Midland Basin assets from Laredo110 
Sep'22NOG acquires Northern Delaware Basin interests from Alpha Energy Partners158 
Oct'22NOG bolts on Delaware Basin assets from an undisclosed seller130 
Oct'22NOG acquires stake in Midland Basin project from Midland Petro DC Partners330 
Oct'20Pioneer and Parsley Energy combine in all-stock deal7,621 
Apr'21Pioneer acquires Midland Basin pure-play DoublePoint $6,375 

M&A, Shale, Independent E&Ps
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