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Pundits Bet On Next Big Deal In The Permian Basin

Concho Resources’ announcement March 28 that it had agreed to buy RSP Permian for $9.5 billion has led pundits to speculate on who will be next to pair in the hot Permian Basin of West Texas and New Mexico.

Back in January, analysts had pegged RSP Permian as a top takeout candidate for 2018. But there were two other names that were high on their list.

One was Callon Petroleum, which analysts at Tudor, Pickering, Holt said had solid assets and the potential for net asset value upside. They did warn that the stock market probably needed multiple quarters of solid execution for the equity to get back on track.

The other potential takeover candidate was Lilis Energy, which has more than 15,000 net acres mainly concentrated at the county lines in Winkler/Loving, Texas, and Lea, New Mexico.

While the company has had some past management issues (its CEO Avi Mirman resigned last year after stock fraud allegations involving a different company), Williams Capital analyst Gabriele Sorbara said Lilis had showcased some top-tier wells in the Wolfcamp B area but that proving up more zones would be key to driving share outperformance.

Sorbara also noted back then that Lilis’ shares were only trading at $32,100 per undeveloped acre, versus the $38,200 that Oasis Petroleum agreed to pay for properties from Forge Energy in December and the $58,000 valuation for RSP Permian, Lilis’ closest neighbor.

Lilis has continued to have management issues, with the company announcing this week that chairman Ronald Ormand was taking over the CEO position from James Linville, who resigned along with two board members.

The Concho-RSP Permian transaction also led Lilis’ properties to appear to be increasingly more valuable.

Sorbara estimates the deal traded for around $72,637 per undeveloped acre, a positive read-through for other operators in the area, including Energen, Diamondback Energy, Parsley Energy and SM Energy.

Seaport Global Securities predicts a “dogfight” among companies to secure pipeline capacity, service equipment, water and people in the Permian Basin, furthering the case that consolidation in the basin is likely. The firm notes “oft-mentioned” names within the M&A conversation include Callon, Lilis and Energen as well as Abraxas Petroleum and Halcon Resources, which it thinks is worth $10 per share based on the Concho-RSP Permian deal versus a recent $5.24.

Raymond James analyst John Freeman thinks potential targets could include Energen and Parsley as well as Centennial Resource Development, Jagged Peak Energy, Laredo Petroleum and Matador Resources. He said their stocks trade at attractive valuations based on consensus estimates and/or have acreage that overlaps with larger potential acquirers.

Who would be the most likely buyers? According to Simmons, major oil companies with massive acreage in the region would have competitive advantages, including Chevron and Occidental Petroleum. Other potential acquirers include companies that aren’t in the Permian in a big way, including BP, Total, Statoil, Hess and Murphy Oil.

But Simmons & Co. analyst Guy Baber said in a report last week that he would be surprised if any of the latter group made a big acquisition in the Permian. “The big picture priority for most is upon FCF [free cash flow] generation and corporate returns enhancement,” he said.

All eyes are on BHP Billiton’s sale of its U.S. shale assets, including a large Permian position. Sky News reported last month that Royal Dutch Shell – whose Permian acreage is next door to BHP’s – has teamed up with Blackstone on a joint $10 billion bid for all of the assets.

However, Shell CEO Ben van Beurden has said that the company will be disciplined when it comes to capital allocation, including a framework that won’t surpass $30 billion, Baber notes. “The hard ceiling would appear to limit the likelihood of a sizable, U.S. unconventional acquisition,” he said.

ConocoPhillips management also has communicated that acquisitions in the Permian must compete with lower cost opportunities already in its portfolio.

Large independents also could be interested in increasing their positions in the Permian. One is Diamondback Energy, which was thought to be a possible buyer of RSP Permian given its Spanish Trail position in western Midland County, Texas. It’s interesting to note that the company’s CEO, Travis Stice, used to work at potential target Laredo Petroleum.

Diamondback’s shares have recently underperformed its Permian peers, possibly as a result of expectations that the company may rush to be a consolidator in the basin, Simmons analyst David Kistler said in a report this week.

While that’s not out of the realm of possibility, he thinks the likelihood of a large acquisition is minimal as the assets would need to compete for capital within Diamondback’s portfolio while also having a valuation that immediately adds to earnings and supports continued strong return metrics.

“More specifically, with best-in-class return on capital, a recent dividend initiation and a current portfolio that boasts high margins, which has supported years of outperformance vs. peers, we expect that the company will remain disciplined,” they said. “We believe a corporate transaction would need to screen accretively on essentially all metrics.”

Diamondback CEO Travis Stice said as much at an industry luncheon held by IPAA/TIPRO on Wednesday in Houston. “There will be consolidation in the Permian, but we’ll be disciplined,” he said. “Great assets aren’t great if you pay too much.”
Source: Forbes

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