By Jinjoo Lee
It's a seller's market in the U.S. oil patch.
Occidental Petroleum is in talks to buy CrownRock, one of the last remaining private companies of scale in the Permian basin, The Wall Street Journal reported on Wednesday. If the deal goes through, it would be the latest in a string of mergers and acquisitions this year, including Exxon Mobil's $64.5 billion purchase of Permian giant Pioneer Natural Resources.
The Journal report said the deal could be valued at "well above $10 billion" including debt. CrownRock produces nearly 150,000 barrels of oil equivalent a day, according to Fitch Group. Even assuming a conservative price tag of $11 billion, it implies Occidental would be shelling out at least $73,000 per flowing barrel of oil equivalent a day for CrownRock.
That pricing looks steep compared with other moderately sized Permian deals inked this year. Notably, Ovintiv in April agreed to pay about $65,000/boepd for Permian basin assets from private equity firm Encap, according to an estimate from Bison Interests, an energy investment firm. Civitas Resources' Permian deal from earlier this year implied a $47,000/boepd valuation, according to Bison's estimate. Exxon forked over $91,000/boepd for Pioneer, though arguably Exxon was paying up for Pioneer's vast undeveloped acreage -- something the per barrel metric doesn't capture.
Not that Occidental is averse to paying up. The company famously outbid Chevron to buy Anadarko Petroleum in 2019 -- a deal that seemed reckless back when oil prices plunged in 2020 but has paid off handsomely. Occidental was the top performer in the S&P 500 in 2022 and the company is in a much better spot financially now, having shed some $30 billion of long-term debt since its post-acquisition peak.
The current oil market isn't particularly supportive. Prices declined even after OPEC+ announced a further production cut on Thursday. Meanwhile, investors haven't rewarded companies for making acquisitions, as evidenced by the lukewarm reception to Exxon and Chevron's deal announcements.
Still, the shrinking pool of acquisition targets and the market's discount on small producers should provide enough motivation for consolidation. An index that is heavily weighted toward Exxon Mobil, Chevron and other large producers is 43% more expensive than an index tracking smaller producers, based on enterprise value as a multiple of forward-12-month earnings before interest, taxes, depreciation and amortization. Any company that can be "bite size" for another company is in a good position, notes Dan Pickering, chief investment officer at Pickering Energy Partners. Large Permian-focused bites include Diamondback Energy, while smaller targets include Matador Resources, Permian Resources and Callon Petroleum.
This game of musical chairs is only bound to get more intense. Whoever wants the next seat will have to pay up.
Write to Jinjoo Lee at jinjoo.lee@wsj.com
(END) Dow Jones Newswires
December 01, 2023 09:03 ET (14:03 GMT)
Copyright (c) 2023 Dow Jones & Company, Inc.
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