[Editor's note: A version of this story appears in the May 2019 edition of Oil and Gas Investor. Subscribe to the magazine here.]

The Permian Basin’s patchwork of acreage is often described as a checkerboard. This is a myth.

That analogy suggests there are semi-discernable square-like tracts that can be joined together to form lateral-well friendly parcels.

The reality is like the sting of English Leather aftershave. The acreage of the Midland and Delaware basins more accurately resembles the world’s most awful quilt.

Anyone who comes across Bernstein’s April 8 acreage map of the Permian may conclude 1) this scene deserved to be cut from John Travolta’s “Battlefield Earth” and 2) he or she is frankly taking a risk by staring at it for too long.

Bernstein’s Bob Brackett titled the map, “The Permian is ripe for consolidation.”

Alas, the Permian market remains in virtual stasis, waiting to rouse itself somewhere around $60 WTI, according to Neal Dingmann, an analyst at SunTrust Robinson Humphries. In a March 27 report, Dingmann said some land packages have been on sale for eight months or longer. In the Permian, a lockdown remains in effect as public companies concentrate on capital discipline and free cash flow.

Still, he has optimism. “While the days of upward of $80,000 per acre for undeveloped Permian acres are behind us, private-equity-backed companies have worked diligently through 2018 to ramp production and create PDP value.” In theory, this would allow acquirers to demonstrate accretive deals to Wall Street.

Should you play this theme? Brackett asks. He answers that consolidation is likely to be more 2018 style equity-for-equity deals, with acquirers beaten by the market like dead horses.

“That’s tough,” Brackett wrote, in elegant understatement. “We recommend investors take advantage of large-cap, quality Permian E&Ps that have sold off this year” such as Pioneer Natural Resources Co., Concho Resources Inc. and EOG Resources Inc.

Brackett offered a list of companies most likely to be taken out through a purchase or merger, ranking them in terms of (small) scale, cost structure, rapid production growth and cheap valuations. Top takeout candidates include Halcón Resources Corp., Lilis Energy Inc. and Rosehill Resources Inc.

Interestingly, none of those companies appear to be actively marketing assets, according to Dingmann. Midland sellers include Legacy Reserves LP, DoublePoint Energy LLC, QEP Resources Inc., EnerVest Ltd. “and more.” In the Delaware, sellers Legacy, Felix Energy LLC, Boyd & McWilliams, Diamondback Energy Inc., Encore Permian LP, Black Mountain Oil & Gas LLC, Occidental Petroleum Corp., Percussion Petroleum LLC, Jetta Permian LP “and more” are working the data rooms.

And yet, just when the Permian seems to have bottomed out, Callon Petroleum Co. comes out of nowhere with a deal for its noncore assets.

RELATED: Callon Petroleum To Sell Piece Of Permian Basin Position For Up To $320 Million

The company said on April 8 that it would sell its Ranger assets in Reagan County, Texas, for $260 million—with another $100 million in potential payments pegged to oil prices.

Callon, it must be said, has an interesting perspective on what it considers noncore.

In selling the assets, Callon noted that its remaining 70 net delineated locations “exceed its internal threshold of an IRR of greater than 25% at strip pricing.”

The truism of noncore assets is best summed up by paraphrasing Eminem: noncore assets are whatever a company says they are. If they weren’t, then why would they say they are?

To be sure, Callon’s assets have lost their sheen as they’ve been cut from the big three-color capex pie chart in the sky. In March 2018, Callon’s Reagan assets were producing 5,835 barrels per day (bbl/d) of oil, according to Texas Railroad Commission records. In January, production had fallen by half to 2,893 bbl/d. Callon said that, as of February, it was producing about 2,000 bbl/d of oil.

Callon was upfront about favoring its Delaware assets with cash with less going to the Midland and Ranger in particular. The company pointed out its capex plans won’t change with the sale to an undisclosed buyer because no activity was planned for the Ranger area.

Still, look past the initial flashbang grenade of a deal and Callon also completed a fine bit of consolidating. The company boosted its position in northwest Howard County, Texas, and added two long-lateral drilling spacing units by trading away working interest elsewhere.

The net gain to Callon: 167 net acres in the Midland and $14 million in cash proceeds.

Collectively, the trades and swaps in the Permian Basin likely add up to billions of dollars, one advisor told Oil and Gas Investor in January.

Between now and the next big merger, the work of consolidation will carry on in much the same fashion, one stitch at a time.

Darren Barbee can be reached at dbarbee@hartenergy.com.

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