US oil and gas producer Diamondback Energy's $9.2 billion acquisition of rival player Energen this week should generate significant synergies and improved overall production on operations in the prolific Permian Basin shale play, according to analysis by Rystad Energy. This deal, coming hot on the heels of Diamondback's $1.25 billion acquisition of private player Ajax Resources, propels Diamondback to the top of the list of Permian M&A spenders in 2018. Along with the merger earlier this year of Concho Resources and RSP Permian, Diamondback's latest moves signal a clear shift in the US shale industry towards consolidation as players seek operational and capital efficiencies.
Prior to the Energen acquisition, Rystad Energy's global upstream database, UCube, put the value of Energen asset portfolio at $7.84 billion, assuming a WTI oil price of $65 per barrel. Within that overall valuation, the unconventional oil and gas reserves classified as proved, developed and producing account for $2.7 billion, while the contribution from future shale completions in the Midland and Delaware sub-basins represent $2.6 billion and $2.2 billion, respectively.
“Acreage positions of Energen and Diamondback are strictly adjacent only in a few selected areas of the Permian Basin. Therefore, synergies from the increased number of long-lateral locations will be limited. Nevertheless, relative proximity of individual acreage blocks in the Northern Midland basin opens the door to significant logistical efficiencies, which will ultimately allow for material drilling and completion cost savings on a per-well basis,” says Artem Abramov, VP Shale Research at Rystad Energy.
On the Delaware side of the Permian, a core part of Energen's acreage is concentrated at the intersection of Loving, Ward and Reeves counties. Diamondback's Delaware position, meanwhile, is located farther south, primarily in Reeves and Pecos counties. Only limited logistical synergies can be realized in the Delaware, but the significance of extending Diamondback's footprint in the northern part of the Delaware basin cannot be underestimated.
Easier access to capital given the increased size of the company is another indisputable positive effect of consolidation. Finally, among well-established Permian players, Diamondback stands out with both an efficient cost structure and outstanding well productivity.
“Looking at realized oil decline curves for 2016-2018 completions in the Northern Midland, we observe that Diamondback's wells typically deliver 25% higher cumulative oil production over the first year as compared to Energen's wells. This outperformance in normalized productivity is mirrored by lower proppant intensity, significantly lower drilling and completion costs and consequently lower breakeven prices on Diamondback's portfolio,” says Abramov.
While more favorable well economics might be partially explained by acreage quality, it is highly likely that Diamondback will be able to generate improved results from Energen acreage, further boosting the valuation of the combined portfolio.