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Conoco’s Deal With Shell Signals End Of Permian Consolidation Rush

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In a blockbuster deal that represents the largest all-cash acquisition in the U.S. upstream sector in more than 3 years, Houston-based ConocoPhillips

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agreed to purchase the Permian Basin assets of Shell for $9.5 billion. The deal, announced Monday afternoon by Shell, will add 225,000 additional net acres to ConocoPhillips’ already sizable holdings in the world’s busiest oil and gas play.

Shell’s intention to sell out of the Permian has long been public knowledge, as the European major based in The Hague searches for ways to reduce its carbon footprint after suffering an adverse decision in a Dutch court. The only question over the past several months involved which other big Permian producer would buy those assets, which are expected to produce 200,000 barrels of oil equivalent per day in 2022.

That buyer turned out to be ConocoPhillips, the largest independent producer in the U.S., which had been rumored in recent weeks to have submitted the highest bid among several competitors. The transaction continues the general consolidation activity that has taken place across the Permian over the last two years, and is indicative of the differing outlooks for the future being taken by these two industry giants. For ConocoPhillips, which also acquired Permian producer Concho Resources for $13.3 billion last October, the outlook is obvious: The Permian Basin is the future, at least in the U.S.

In an email, Andrew Dittmar, Senior M&A Analyst at Enverus, said “Conoco is making a major commitment to shale in this deal and in particular the Permian Basin. That is an area that lagged in Conoco’s portfolio for years but has recently leapt to the forefront of its long-term plans, first with the $13.3 billion acquisition of public Permian pure-play Concho Resources in October 2020 and now with the acquisition of Shell’s position. The moves come at a time when shale is generating record cash flow for well-run E&Ps. However, new investment has slowed as companies prioritize getting capital back to shareholders and, in the case of the majors, also investing in energy transition projects.”

Dittmar pointed out that ConocoPhillips has shown great patience in seeking out its acquisition opportunities in the Permian, and that patience has been rewarded by picking up major new assets for comparative bargain prices.  “After waiting patiently on M&A opportunities through the land-rush years of the shale boom, Conoco has been able to pick up prime Permian real estate at what looks to be attractive price points. For example, in this deal Conoco reports paying about $15,000/acre for Shell’s position, a fraction of the nearly $60,000/acre Occidental paid for overlapping land in its purchase of Anadarko in 2019. Conoco’s purchase of Concho also priced attractively at $10,000/acre per analysis by Enverus.”

Dittmar also points to Conoco’s ability to pay cash in this latest deal – an ability that some of its rivals for the deal may not have enjoyed – as key to this transaction, since it will help facilitate Shell’s desire to distribute most of the proceeds to shareholders. “Conoco’s ability to pay cash in a deal of this size likely contributed to nabbing the assets at an attractive price point. Most of the large deals, and even smaller sized corporate transactions, since the emergence of COVID have been largely or entirely for stock. That is fine in a corporate merger or acquisition of a private company from a private equity investment firm. However, from Shell’s perspective cash is likely vastly preferable. In line with the market’s desire for capital returns, the company plans to distribute $7 billion of the total $9.5 billion sales price to shareholders with the balance slated for debt reduction.”

Conoco already ranked as one of the largest producers in the Permian, but once this deal is consolidated it will likely rank near the top along with Chevron

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and Pioneer Natural Resources

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. For corporate producers, this strategic approach of growing ever-larger in the Permian in order to take advantage of economies of scale means big independent producers like Noble Energy

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, Anadarko Petroleum, Concho and Parsley Energy that used to dot the Basin’s landscape no longer exist.

At the same time, that means the number of attractive targets for future deals – like Diamondback Energy

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and Apache Corporation

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and possibly even Pioneer itself – has dwindled. This reduction in the number of targets along with the increased focus by corporate producers on increasing returns to shareholders likely means that future big consolidation deals focused on this basin will be fewer and farther between.

But it sure has been interesting while it’s lasted.

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