Exclusive: Surge Energy Seeks Midland M&A with $1.3B in Dry Powder

Surge Energy grew from a relative nobody into one of the largest private U.S. oil producers—and the Permian Basin E&P still wants to get bigger.

With approximately $1.3 billion in dry powder to put to work, Houston-based Surge is actively searching for M&A in the Midland Basin, Surge Vice President Travis Guidry told Hart Energy.

Guidry, who joined Surge in 2016 and will take over as CFO in January, said Surge ended the third quarter with a cash balance of over $400 million and $900 million undrawn from a credit revolver.

“Naturally, we’re looking to further grow and add to inventory,” Guidry said in an interview.

Surge is already one of the largest privately held oil producers in the nation, according to Enverus Intelligence Research data.

The company’s output has grown from around 4,000 boe/d after making an initial acquisition in 2015 in Howard and Borden counties, Texas, up to 62,400 boe/d (68% oil) as of the end of the third quarter.

Third-quarter oil production averaged around 42,800 bbl/d; Gas output averaged 117.4 MMcf/d, per Surge investor materials.

Surge estimates that it has around 11 years of inventory remaining in the northern Midland Basin. The company has targeted the Wolfcamp A, Lower Spraberry, Middle Spraberry, Lower Clear Fork and Wolfcamp B shale benches.

Surge’s leasehold position in Howard and Borden counties was approximately 105,000 net contiguous acres as of the third quarter.

But as Surge looks to grow even further, the company is looking for M&A opportunities—mainly in the area where it already has infrastructure built out.

“We like things that we can tie into our infrastructure to continue to be the lowest-cost operator,” Guidry said.

Surge says it boasts some of the lowest lease operating costs (LOEs) in the Permian, at an average of $4.46/boe. Guidry said the company has invested $175 million on water and electrical infrastructure to lower its operating costs.

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M&A big and small

As Surge prowls the marketplace for M&A, potential deals could come in all shapes and sizes, Guidry said.

The company certainly isn’t ruling out large-scale M&A—where it makes sense. Surge CEO Linhua Guan says it’s one of the few private producers capable of inking a $1 billion check.

And there are a few assets of notable scale in Surge’s northern Midland neighborhood that could pique the company’s interest.

Publicly traded HighPeak Energy’s acreage position is located effectively next door to Surge. As the company continues to explore strategic alternatives, HighPeak has had a “for sale” sign hanging around its neck since the beginning of last year. 

HighPeak’s northern Midland portfolio includes around 137,000 net acres and average production of 51,300 boe/d, the company said in third-quarter earnings.

Another institutionally backed E&P in the area is Birch Resources, which produced approximately 77,800 boe/d during August, according to the Texas Railroad Commission’s (RRC) most recent figures—including 41,200 bbl/d of oil production and 219.4 MMcf/d of gas output.

Murchison Oil & Gas LLC is a smaller, family-owned producer adjacent to Surge’s acreage in Howard and Borden counties.

Murchison produced 9,615 boe/d from the Permian Basin in August, including oil output of nearly 7,000 bbl/d, per RRC data.

“Obviously, we’d like to execute larger transactions,” Guidry said. “But asset-level transactions in a larger sense have been fewer and far between.”

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Divestitures

After a whirlwind of high-profile Permian M&A over the past two years, Surge thinks divestiture packages of northern Midland Basin assets could hit the market.

Public E&Ps that have executed large-scale acquisitions are cleaning up their portfolios and selling off non-core assets to reduce debt.

Potential sellers in the northern Midland Basin could include Diamondback Energy and Occidental Petroleum, Guidry said.

Diamondback closed a transformational $26 billion takeover of Permian private Endeavor Energy Resources in September.

“Diamondback has a very strong track record of rationalizing their portfolio and selling things that don’t make as much sense to them—or is kind of the back end of the schedule,” Guidry said. “We anticipate that they’re going to put some deals in the market, so we’ll look for that.”

Occidental closed its own $12 billion acquisition of private Midland producer CrownRock LP in August.

To reduce debt, Occidental has already been divesting non-core assets in the Permian and in Wyoming’s Powder River Basin.

“We think there are some things in Howard County, [Texas] that [Oxy is] going to sell,” Guidry said. “When we see those, we will likely participate in some of those processes.”

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Ground game

Outside of large-scale M&A, Surge is also keeping an eye on grassroots leasing and smaller deal opportunities in the northern Midland Basin.

That includes farm-in deals, one of which Surge executed during the third quarter.

“We drilled six wells for a public company in Howard County,” Guidry said. “That was a way of cheaply adding to inventory.”

Surge thinks additional northern Midland farm-ins could become available as public operators focus on the basin’s core and limit spending to return capital to shareholders.

The company is also working to organically extend its inventory by proving up untapped zones underground.

Surge was an early entrant in Borden County, Texas where the company has proven over time that the Wolfcamp A bench can be developed economically.

“When we started, we were probably the only operator doing that,” Guidry said. “Now, there’s both public and private operators that are active in Borden County. We’ve definitely been a trendsetter on that.”

The question for Surge now is whether Borden County development can support a second bench in addition to the Wolfcamp A.

“We’re going to be testing the Spraberry in that area to see if we can prove that up as well,” Guidry said.

Surge has also gotten back into developing the Middle Spraberry zone in Howard County, which had fallen out of its core development plans in recent years.

Guidry said Surge is confident in its multifaceted growth strategy.

“We’re looking for larger deals. We’re willing to do the hard work and get the smaller deals done—grassroots leasing, farm-ins,” he said. “Then of course, continuing to look for opportunities to grow organically.”

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