Post-Earthstone Deal, Permian Resources Switches Up M&A Strategy

MIDLAND, Texas— Permian Resources co-CEO James Walter isn’t feeling a shred of buyer’s remorse over the company’s $4.9 billion acquisition of Earthstone Energy—including the Midland Basin assets it purchased somewhat as an afterthought.

If anything, Earthstone’s mix of Midland and Delaware basin assets are looking more attractive than when they were first acquired, Walter said at Hart Energy’s 2023 Executive Oil Conference and Exhibition on Nov. 16.

When the deal closed in early November, Permian Resources’ focus was on the Delaware assets it was adding: an additional 56,000 net acres in the northern part of the play.

Its newly acquired Midland Basin assets were more or less put on the back burner, with the company planning to deploy 90% of its capital spending in the Delaware, Hart Energy reported in August.

But the more the company digs into the asset, “the more we like it,” Walter said. “I'd say there's probably a deeper bench of inventory than we expected,” he said. “With the recent rallying and commodity prices, it's better and more attractive returns than we thought.”

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Nevertheless, Walter maintains that the Midland is not as advantageous as the Delaware.

Walter said the opportunity set in the Delaware today is “as rich as it’s ever been.” By contrast, the Midland offers thinner opportunity to consolidate after an active year for M&A. Likening the basins’ development to baseball, “If the Midland Basin is in the seventh to the eighth inning, maybe the Delaware Basin is in the fourth or the fifth,” he said.

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But as the industry moves into a consolidation mode, opportunities are shrinking inside the Permian and out.

Along with a slew of other deals this year, Exxon Mobil Corp.’s announced $60 billion acquisition of Pioneer Natural Resources will further concentrate ownership in the Midland Basin. In the Bakken, Chevron’s agreement to merge with Hess in a $53 billion deal will likewise take another large independent off the board.

In a separate session at the Executive Oil Conference, Ryan Duman, director of U.S. upstream research for Wood Mackenzie, said Permian Tier 1 inventory is becoming scarce. WoodMac data shows 80% of remaining Tier 1 acreage in the Permian is held by a small number of companies with a market cap of more than $30 billion, Duman said.

Breaking down Permian Resources’ new Earthstone Delaware Basin inventory, Walter said almost, if not all, of its position in New Mexico is Tier 1 and core of the core.  

"We've been really pleasantly surprised, especially even with the last few months' developments in all the New Mexico properties,” he said.

Walter pointed to its gassier Culberson County, Texas, properties as Tier 2 or Tier 3—part of assets purchased by Earthstone earlier this year for $1 billion.

To keep up with Permian E&P consolidation and continue to have competitive Tier 1 inventory, Walter said the company is not discounting the value in smaller-scale deals.

As deals are evaluated for cost competitiveness, Walter said, small-ball grassroots acquisitions and leasing are more attractive because they generate higher rates of return at lower risk.

Permian Resources has “found a ton of value on the smaller-scale stuff,” Walter said. “That could be the $10,000 lease within an existing Permian Resources drilling unit. That could be a $10 million deal from a local landman, or it could be a $100 million acquisition like we did in January of this year from a legacy New Mexico operator.”

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