9.5 Billion Shale Deal Could Signal Consolidation in Permian -- Update
March 28 2018 - 11:33AM
Dow Jones News
By Christopher M. Matthews and Bradley Olson
Concho Resources Inc. has agreed to buy RSP Permian Inc.in a
deal that could herald the start of a consolidation push in
America's most active shale-drilling region.
The companies are valuing the all-stock deal at roughly $9.5
billion, including net debt from RSP, both firms said Wednesday.
That would make it the largest-ever deal in the Permian Basin, the
area of Texas and New Mexico where big companies including Exxon
Mobil Corp. and Chevron Corp. are now ramping up production along
with smaller independent shale drillers.
The deal could mean it is "game on in the Permian," investment
bank Jefferies Group LLC said in a note to investors, as other
producers in the region could move to snatch up smaller
competitors. The combination will make Concho the region's biggest
current active driller, the companies said.
"We're now getting more into the development phase" of the U.S.
shale boom, said Tim Leach, chief executive of Concho Resources.
"The efficiency that you can gain by a bigger balance sheet and a
bigger program is really what's driving this transaction."
The pace of deals for U.S. shale producers has slowed recently
as investors demand the companies exercise discipline and live
within their means to provide better returns to shareholders.
Larger-scale deals involving assets across the U.S. have been
unpalatable to many producers because of shareholder pressure, say
bankers and lawyers advising the companies. But deals restricted to
assets in the Permian, where logistical scale can provide a huge
advantage, could make sense, some say.
As the U.S. shale boom matures and drilling levels continue to
intensify in the Permian basin, more operators are trying to boost
production while holding down costs. That has become far more
complex as companies scramble for workers and supplies needed for
the enormous fracking jobs that are far more common now.
Managing the logistical challenge of preparing and disposing of
the sand, water, chemicals and other supplies needed for these
developments has become a daunting prospect. For example, the sand
required for just one well can fill 100 railcars, according to
industry analysts.
"If one considers the importance of scale/scope in a currently
labor and service constrained Permian basin. this represents a
long-term significant strategic advantage," said Simmons & Co.
in a note to investors.
Companies also are moving to drill many wells all at once in
certain areas to save costs and ensure that the wells don't
interfere with one another, a prospect that would reduce their
profitability. All those factors point to a need for bigger
companies.
Concho is paying a large premium for RSP, purchasing its assets
for $76,000 per acre, according to Jefferies' estimates. That price
is significantly higher than in other recent deals in the Permian,
in which prices were roughly $40,000 per acre or less.
The deal would expand Concho's Permian Basin footprint by about
92,000 acres and would give Concho 27 rigs, the basin's biggest
drilling program. Occidental Petroleum Corp. has the highest
production from the area, but much of its output is from recovering
oil out of older wells.
Given its growth plans, Concho is on track to become the biggest
producer in that region within a few years, and all of its
operations involve newer, more advanced techniques.
Shares of Concho fell more than 8% Wednesday following the
announcement, while RSP shares gained more than 15%.
The deal is expected to close in the third quarter and still
requires shareholder and regulatory approval.
--Allison Prang contributed to this article.
Write to Christopher M. Matthews at christopher.matthews@wsj.com
and Bradley Olson at Bradley.Olson@wsj.com
(END) Dow Jones Newswires
March 28, 2018 11:18 ET (15:18 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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