Permian Basin acreage values have escalated significantly since 2010, but would-be asset sellers must ask themselves, “Am I driving a Mercedes, or a Chevy?” That answer reveals a three-times differential in the value of that property, according to Mike Wichterich, president of Three Rivers Operating Co.

“When the public companies don't want it, the value drops way down,” Wichterich said, speaking to ADAM-Permian attendees in Midland, Texas, recently.

Wichterich described “Mercedes” properties as those desirable to large, public independent oil and gas companies: Offering a sizeable, scalable acreage position; contiguous; and near proven production.

Recent Permian deals illustrating such Mercedes values include Sinochem/Pioneer Natural Resources for $19,000 per acre; Occidental Petroleum/J. Cleo Thompson for $13,700 per acre; Rosetta/Comstock for $14,000 per acre; and Diamondback/Undisclosed for $10,000 per acre.

To a public company, these are wholesale prices, Wichterich said, based on the retail lift they get in stock price by being leveraged to the Permian.

“It's about the potential,” he said, pointing to Pioneer's stock up by 83% since the beginning of the year, Cimarex by 74%, Laredo Petroleum by 76%, new IPO Athlon Resources by 60%, and the darling of the Permian, Diamondback, up 139%. Contrast that with production of these players at 6% growth, and oil prices at a 4% increase for the same period.

“What's causing that? It's not PDP [proved developed producing assets]. The only answer is acreage values are driving that.”

Backing out PDP, he calculated the public market's perceived valuation for nonproducing acreage for the companies above is an average $26,000 per acre. “That's incredible valuation.”

Public independents can also pay a premium because they can use stock to purchase, or issue stock quickly thereafter, to fund the deal. “That is essentially money they don't have to pay back,” he said.

Conversely, “Chevy” assets might be broken up, too small to support a scalable development program, or too far from the prime zip codes.

“Prices on this acreage are about a third of prices on the Mercedes acreage,” Wichterich said. “If you're getting $15,000 per acre for Mercedes assets, Chevy assets are trading for about $5,000. That's because cash buyers have to pay the money back.”

Sellers of “not primed for show time” properties typically expect to receive the same valuation as Mercedes deals, he said, and this has resulted in a 30% failure rate for acreage deals in the Permian and a 60% failure for asset deals, by his estimation. “Buyers are struggling with the bid/ask spread.”

These sellers have three options, he said: Wait for the play to reach the manufacturing stage to prove up the value of the acreage; accept a lower cash price; or work out a farm-in to carry well costs.

Three Rivers, based in Austin, Texas, and in its second iteration backed by Riverstone Holdings, holds 25,000 acres in the Midland Basin and another 20,000 in the Delaware Basin. It bids on 30 to 40 asset packages a year.

“Practice makes perfect,” said Wichterich. “When we go into a data room, we're learning (from the seller). We're trying to get the benefit of how everyone else does their business.”

—Steve Toon

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