Some have suggested that the Saudi decision to let market forces determine the price of crude came after realizing that a third major U.S. basin—following the Eagle Ford and Bakken—was poised for rapid development: the Permian. This remains speculation, but few can doubt the prodigious development opportunity in the region that was on display at Hart Energy’s annual DUG Permian conference.

The basin’s tremendous organic growth potential was a distinguishing factor highlighted by Jeff Sieler, managing director and co-head of acquisitions and divestitures in the Global Energy Group of Citigroup Investment Bank, headquartered in Houston.

“Organic growth is the key driver, the key reason, that companies come to the Permian,” said Sieler.

The ability to grow organically in the Permian is attributable to its areal extent—some three to four times greater than the Bakken or Eagle Ford—and the fact that it encompasses as many as six to eight petroleum systems, he said. The stratigraphic column available for hydrocarbon exploitation measures more than 21,000 feet versus about 16,000 feet in the Bakken and 12,000 feet in the Eagle Ford.

These stacked formations serve as “economic multipliers,” a factor increasingly recognized in recent transaction valuations, according to Sieler. Using the Midland Basin within the Permian as an example, Sieler pointed to an upward trend in “headline” acreage valuations, increasing from $18,000/acre to $28,000/acre and $34,000/ acre over 2012, 2013 and 2014, respectively. Adjusted for production, acreage valuations rose from $6,000/acre to $12,000/ acre and $17,000/acre, he noted.

A similar trend in rising valuations for production was, however, not as clear.

“Our belief is that the primary reason behind acquisitions in the Permian today is not necessarily production or reserves; it’s inventory; it’s organic growth with the drillbit,” he explained.

Sieler noted the year-to-date deal count, at just six transactions, trailed the pace of typically 25 to 30 transactions per year, but he expected an “uptick going into the second half of the year.” He categorized deals as acquisitions by either “new entrants,” such as Encana Corp.’s $7.1 billion purchase of Athlon Energy last year, or by existing E&Ps increasing core acreage, such as Diamondback Energy’s $438 million bolt-on acquisition earlier this year.

While these transactions focused on more established targets such as the Spraberry and Wolfcamp intervals, Sieler pointed to numerous other zones that drew attention due to levels of permitting. For example, setting aside the Spraberry, Wolfcamp, Bone Spring and Avalon, industry had filed scores of permits in each of the Atoka, Clear Fork, Fusselman, Mississippian and Pennsylvanian intervals.

Development concepts continue to evolve. Diamondback Energy, for example, has plans to use six “landing zones” (i.e., land the drillbit in six separate intervals), with initial targets being the Lower Spraberry and Wolfcamp B, in each of which it plans eight wells per section, Sieler noted. Diamondback’s plan at its Spanish Trail development in the Midland Basin calls for 34 wells per section. Similarly, Parsley Energy Inc. has a development plan providing for seven zones, up from six previously, with the ability to accommodate up to 15 wells per section per landing zone.

The number and size of operators in the Permian suggest “there certainly exists an opportunity for consolidation.” According to Sieler, as many as 154 operators in the basin have output of at least 1,000 barrels of oil equivalent per day (boe/d), while roughly 60 E&Ps produce from 5,000 to 100,000 boe/d—indicating potential deal sizes of anywhere from $100 million to $10 billion based on recent transactions.

From 2014 through mid-May, over 30 transactions valued at over $20 billion had occurred, he said.

In the Permian, only one operator, Chevron Corp., produces more than 250,000 boe/d, while four companies each had output in excess of 100,000 boe/d, said Sieler. So what is the potential for “mega deals” involving players with production of 100,000 boe/d and more?

“When you look at where the world is today,” said Sieler, “there is a strong desire for companies to reduce the geopolitical risk and yet have the materiality of getting to 100,000 or 200,000 or 300,000 barrels per day. And there are few better places than in the Permian. If you look at the supermajor world and ask, ‘Have they missed out on the Permian,’ I think the answer is ‘Yes.’”

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