Oxy raises the bar in Midland Basin with $12B CrownRock deal

While it might not make it king of the Midland Basin, Occidental Petroleum’s $12 billion cash-and-stock purchase of private CrownRock LP from Lime Rock Partners and the Dunn family does promote the company into the major leagues within the play by adding more than 1,000 gross incremental locations on 94,000 net acres and 170,000 boe/d of anticipated 2024 production. The sale of CrownRock could also be the first leg of a triple crown of mega-sales by private companies in the Permian with Endeavor Energy Resource, an even larger Midland Basin producer with more than 5,000 gross remaining locations, and Delaware-centric Mewbourne Oil also potentially up for grabs.

Tempting these private companies is the ever-escalating value of their undrilled acreage in M&A markets. At more than $50,000 per acre after accounting for the value of existing production, the price paid by Oxy shows valuations have fully reclaimed the highs last seen during the buying frenzy of 2017-2019 and are inching toward records. Oxy was also one of the major participants in that wave of consolidation, nearing but not achieving the highest acquisition price paid when it valued Anadarko Petroleum at nearly $60,000 per acre. What differentiates the CrownRock purchase is that the high price is being paid for a private company and overwhelmingly in cash, versus other deals in the same stratosphere that have been largely stock-for-stock public company mergers like ExxonMobil’s pending purchase of Pioneer Natural Resources.

With the use of cash to pay $9.1 billion of the deal price plus the assumption of $1.2 billion in CrownRock debt, Occidental is planning on a new debt incurrence of $10 billion, raising its total to about $28 billion. The company plans to reduce that to $15 billion using excess free cash flow and $4.5-6 billion in non-core asset sales. As with all non-core sales, Occidental will have to strike the right balance, choosing assets it is comfortable parting with but that still have value to buyers.

The driving force behind rising valuations is an urgency by large companies to secure the remaining high-quality U.S. shale inventory. Enverus Intelligence® | Research calculates there are only about six years of the highest-quality inventory, capable of generating a 10% return at a $45/bbl oil price, left at current drilling rates. More than 70% of it is in the Permian Basin. With no new shale plays on the horizon and global opportunities shrinking, the Permian also leads in potential for finding new resource as drillers test additional benches of the region’s stacked pay. Oxy has been a leader in that by drilling the deep Barnett bench within the Midland Basin and generating very promising results.

Oil and gas companies are also perhaps feeling more positive about the long-term need for their products as the world grapples with the realities and expense of transitioning to low-carbon energy. Oxy is also a model for a new oil and gas producer as it both doubles down on production in the Midland Basin with the CrownRock deal and looks to build the world’s largest operational direct air capture facility in Ector County, Texas, to sequester CO2.

With Chevron, Exxon and Oxy all announcing major acquisitions this fall, ConocoPhillips and EOG Resources look positioned to be next up as the largest companies yet to announce a deal, and either could be a buyer for Endeavor. While EOG has traditionally eschewed M&A for organically discovering new drilling opportunities, it has occasionally been interested in private family companies and previously bought Yates Petroleum for $2.5 billion in 2016. Chevron and Exxon have also kept their powder dry by using entirely equity in their recent corporate deals, so they could still potentially participate in private opportunities.