The Permian Basin has always been the most coveted basin in the US and, therefore, has always commanded a premium over all other basins.It continues to be attractive to buyers for a variety of reasons: It is oily in nature; it offers a conventional and unconventional playground for all buying sectors, from master limited partnerships (MLPs) to major oil companies to publics to private equity; and it offers buyers the serendipity of an unparalleled depth of multipay features compared with other basins.

For these reasons, we are currently seeing buyer demand in the Permian at unprecedented levels, especially from private equity and new entrants.

Historically, during an RBC Richardson Barr broad sales process of Permian assets, we have typically seen 25 to 30 executed confidentiality agreements, 15 to 20 data-room visits, and eight to 10 bids (with 25% to 30% participation from private equity).Currently, we are seeing a dramatic increase in those numbers to 40 to 50-plus CAs, 25 to 30-plus data rooms and 10 to 15-plus bids (with nearly 50% participation from private equity).

With $60 billion in private equity, $20 billion of enterprise value from 11 E&P MLPs, and a plethora of public companies looking to get into the Permian via an acquisition, it is no wonder the Permian is currently the hottest basin on the planet.

Unconventional era

From a resource play perspective, the Permian is one of the “Big 3” most-coveted oil/liquids resource plays.This is due, in large part, to the tremendous early success of the horizontal Wolf-camp, both in the Midland Basin and southern Delaware Basin.

A steady dose of 1,500-plus barrel-of-oil-equivalent-per-day horizontal Wolf-camp wells in various benches (Wolfcamp A, B, C and D) has not only sparked an incredible wave of buyer hunger for Wolfcamp acreage but, moreover, has fueled the equity and IPO markets to unprecedented levels for Permian-focused names.

In the private A&D market, core, de-risked Wolfcamp acreage with multiple prospective Wolfcamp benches is currently trading at $20,000 to $25,000 per acre.These assets are in the A&D “sweet spot” of assets that display the four Rs: rate, repeatability, rate of return and run room.Sellers with assets in this sweet spot can expect to achieve the strongest valuations the market is willing to bear.

Acreage not de-risked, with no consistent type curve established, is lower on the S curve, and is thus immature and too risky for the market to pay a premium.Assets above the sweet spot are more mature, with a heavier production component, and are more suitable for an MLP.

The only thing more robust than the Permian private A&D market is the public-equity market.Ever since the Sinochem/Pioneer JV in the Wolfcamp earlier this year, at nearly $20,000 an acre, investor appetite for Permian-focused names has exploded.

Permian-focused public companies are currently trading at $25,000 to $30,000 or more per acre, resulting in an arbitrage between the private and public markets.

As long as this arbitrage exists, we will continue to see companies with significant Wolfcamp exposure follow the paths of Diamondback Energy and Athlon Energy and IPO in the near term, as opposed to offering their assets for sale via a sales process.

Conventional premiums

On the conventional side, however, we are seeing a totally different type of demand in the Permian.The low-risk, flat-decline characteristics of many of the legacy oilfields, specifically in the Central Basin Platform, have been intensely sought after by financial buyers—MLPs and private equity.

As such, conventional oil assets in the Permian continue to command a premium over other conventional oil assets in the US These routinely trade at valuations in the range of $125,000 to $150,000-plus per barrel of oil equivalent per day, and 6x to 8x-plus forward 12-month cash flow—all translating to aggressive single-digit discount rates for proved developed producing assets.

A new-entrant buyer might be downright frightened by the high cost of entering the Permian, but the Permian has always been the most expensive basin in which to acquire assets.Those who ignored the steep cost of entry just five years ago might now own assets with exposure to the Wolfberry, horizontal Wolfcamp, Bone Spring, and potential new lucrative zones in the horizontal Spraberry, Jo Mill and Cline.In five years we will likely be talking about several new prolific zones.

—Craig Lande, managing director,

RBC Richardson Barr

For details on assets on the market, see A-Dcenter.com .

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