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Following the announcement of Chevron's commitment to pay a premium of almost 40% for the acquisition of Anadarko Petroleum, investors quickly increased shares of other potential acquisition targets.
As I explained in the previous article, I think that the Permian was the key to the acquisition of Anadarko, but there are many other targets in the region. There are also several companies with the ability to make acquisitions.
In recent years, the few mergers and acquisitions in the oil and gas industry have been largely concentrated in the Permian Basin. Large integrated oil and gas companies are making more and more incursions into the Permian.
In addition to the new Chevron acquisition in 2017, ExxonMobil paid $ 6.6 billion to acquire the Permian acreage for the Bass family in Fort Worth, Texas. ExxonMobil also spent $ 41 billion in 2009 to acquire XTO, which is very present in the Permian.
Permian players
Today, the main acreage holders in the Permian Basin include Chevron and ExxonMobil supermajors, as well as Occidental, Apache and Concho Resources. In fact, Occidental would have tried to acquire Anadarko before Chevron sealed the deal. But Occidental can now find himself in the sights of a larger player seeking to strengthen his Permian portfolio.
But there are many other important producers in the region, including ConocoPhillips, EOG Resources, Pioneer Natural Resources, Noble Energy, Devon Energy and Diamondback Energy. The smallest producers in the region are WPX Energy, Persil Energy, Cimarex Energy, Callon Petroleum, Centennial Resource Development, Jagged Peak Energy and Laredo Petroleum.
Let's first look at the largest companies operating in the Permian according to their value. This measure is preferable to market capitalization because it includes a company's debt. In the case of a potential acquisition, the acquiring company would be liable for that debt in addition to the purchase price. It is therefore a more complete representation of the market value of a business. Related: Why gasoline prices could be about to fuse
I've included integrated supermajors who could have the ability to make major acquisitions, three of the largest exploration and production companies (who could make an acquisition or be a target themselves) and Anadarko to comparison title. All data was extracted from the S & P Capital IQ database.
(Click to enlarge)
Data for major oil companies operating in the Permian Basin.
- EV – Value of the company at the close on April 12, 2019 in billions of US dollars
- EBITDA – TTM earnings before interest, taxes, depreciation and amortization in billions of US dollars
- TTM – Trailing 12 months
- FCF – Free cash flow in billions of US dollars
- Debt – Net debt at the end of the previous fiscal quarter
- Res 2018 – Total proved oil and gas reserves in billions of barrels of oil equivalent at the end of the year 2018
- EV / Res – The value of the company divided by its proved reserves
Potential buyers
On the basis of their size and their debt parameters, ExxonMobil and Chevron still seem to be the most able to get a big deal. Shell is in the process of becoming a natural gas company and has already made significant capital expenditures in this area in recent years. In addition, in 2016, they made their own major acquisition – a $ 70 billion contract for the BG Group. In the meantime, Total has not shown much interest in the Permian.
BP may not want to buy because its Deepwater Horizon 2010 oil spill liabilities continue to weigh it down. In addition, the lingering effects of this disaster have also meant that BP has by far the cheapest reserves of all the companies listed in the table. Also note that the EV / Res metric for integrated supermajors is not directly comparable to pure oil producers like Anadarko because they also have intermediate processing and refining assets.
ConocoPhillips seems to be the most attractive target for an acquisition from the point of view of pure valuation, but as the largest pure oil company, it would be a big chunk for even ExxonMobil. On the acquisition, ConocoPhillips CEO Ryan Lance said earlier this year that the company was under no pressure to do so. Related: Inquiry: Canadian government is responsible for the oil crisis
Occidental also enters the category of potential acquisitions and acquisitions. On a relative basis, they are more expensive than ConocoPhillips, but on an absolute basis, the price would be more manageable.
What about smaller players like Persil, WPX Energy or Cimarex Energy? On the basis of the price movement that followed the announcement of the Chevron-Anadarko transaction, investors are clearly betting on the fact that other transactions will follow. Below are some statistics about potential acquisition targets (with Anadarko for comparison purposes), including some of the key players listed in the previous table:
(Click to enlarge)
Data for small oil companies operating in the Permian Basin.
- Change of one day – Change in share price on April 12, 2019, day of the announcement of the Chevron-Anadarko transaction
Note that the double-digit gains of Pioneer Natural Resources and Parley Energy imply that investors think that they could be next on the list of acquisitions. Persil has an attractive price depending on its value of business and its total reserves. Several other companies stand out, such as Devon Energy and Cimarex, although they all exceeded their cash flows in 2018. An acquisition by one of the major players could enable them to gain in efficiency and achieve economies of scale.
Another name on the list that stands out is Diamondback Energy, which has long been one of my favorite oil companies in the Permian Basin. Diamondback has been an exceptional player in recent years, but it now seems to be the most valued by several indicators after its acquisition of Energen in 2018.
The biggest challenge for small players is that they may not have enough reserves to really move the profits of the big players. Laredo Petroleum's reserves of more than 200 million barrels of oil and gas may not be attractive enough for ExxonMobil, which had 24 billion barrels of reserves by the end of 2018. But that could be attractive to a company like EOG Resources, which closed the year with 2.8 billion barrels of reserves.
In the end, price and valuation are only part of the equation. Anadarko was not the cheapest acquisition target for Chevron, but Chevron appreciated the synergies between the Anadarko sites. Thus, each major operator in the Permian is more likely to acquire companies whose properties are adjacent to theirs. A deeper dive therefore becomes not only an interesting exercise, but also to study the maps of the Permian producers, big and small.
By Robert Rapier
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