While it might not make it king of the Midland Basin, Occidental’s purchase of private CrownRock from Lime Rock Partners and the Dunn family does promote the company into the major leagues within the play, Enverus Intelligence Research Senior Vice President Andrew Dittmar stated in a commentary sent to Rigzone. “The sale of CrownRock could also be the first leg of a triple crown of mega sales by private companies in the Permian with Endeavor Energy Resource, an even larger Midland Basin producer with over 5,000 gross remaining locations, and Delaware-centric Mewbourne Oil also potentially up for grabs,” Dittmar added. “Tempting these private companies is the ever-escalating value of their undrilled acreage in M&A markets. At over $50,000 per acre after accounting for the value of existing production, the price paid by Occidental shows valuations have fully reclaimed the highs last seen during a frenzy of buying in 2017-2019 and are inching towards records,” he continued. Dittmar noted in the commentary that Occidental was also one of the major participants in that wave of consolidation, “nearing but not achieving the highest acquisition price paid when it valued Anadarko Petroleum at nearly $60,000 per acre”. “What differentiates the CrownRock purchase is that the high price is being paid for a private company and overwhelmingly in cash versus other deals in the same stratosphere that were largely stock-for-stock public company mergers like the recent ExxonMobil purchase of Pioneer Natural Resources,” Dittmar said. “With the use of cash to pay $9.1 billion of the total deal price plus the assumption of $1.2 billion in CrownRock debt, Occidental is planning on a new debt incurrence of $10 billion raising its post-close debt to about $28 billion,” he added. Dittmar also highlighted in the commentary that Occidental plans to reduce that to $15 billion using excess free cash flow and $4.5-6 billion in non-core asset sales.Advertisement - Scroll to continue “As with all non-core sales, Occidental will have to strike the right balance of finding assets it is comfortable parting with but that still have value to buyers,” he said in the commentary. The driving force behind rising valuations is an urgency by large companies to secure the remaining high-quality U.S. shale inventory, according to Dittmar. “Enverus Intelligence Research calculates there is only about six years of the highest quality inventory, capable of generating a 10 percent return at a $45 oil price, left at current drilling rates and over 70 percent of it is in the Permian Basin,” he said in the commentary. “With no new shale plays on the horizon and global opportunities shrinking, the Permian also leads in potential for finding new resource as drillers test additional benches of the region’s stacked pay,” he added. “Occidental has been a leader in that by drilling the deep Barnett bench within the Midland Basin and generating very promising results,” he continued. Dittmar stated in the commentary that oil and gas companies are also “perhaps feeling more positive about the long-term need for their products as the world grapples with the realities and expense of transitioning to low carbon energy”. “Occidental is also a model for a new oil and gas producer as it both doubles down on production in the Midland Basin with the CrownRock deal and looks to build the world’s largest operational direct air capture facility in Ector County, Texas to sequester CO2,” Dittmar added. With Chevron, Exxon, and Occidental all announcing major acquisitions this fall, ConocoPhillips and EOG look positioned to be next up as the largest companies yet to announce a deal and either could be a buyer for Endeavor, the Enverus SVP said in the commentary. “While EOG has traditionally eschewed M&A for organically discovering new drilling opportunities, it has occasionally been interested in private family companies and previously bought Yates Petroleum for $2.5 billion in 2016,” Dittmar added. “Chevron and Exxon have also kept their powder dry by using entirely equity in their recent corporate deals and so could still participate in any private opportunities,” he continued. In a statement posted on its site on December 11, Occidental announced that it had entered into a purchase agreement to acquire CrownRock L.P. for cash and stock in a transaction valued at approximately $12.0 billion, including the assumption of CrownRock’s debt. Occidental highlighted in the statement that it intends to finance the purchase with the incurrence of $9.1 billion of new debt, the issuance of approximately $1.7 billion of common equity, and the assumption of CrownRock’s $1.2 billion of existing debt. The transaction is expected to close in the first quarter of 2024, subject to customary closing conditions and the receipt of regulatory approvals, Occidental noted in the statement. The company outlined in the statement that its CrownRock deal “complements and enhances Occidental’s premier Permian portfolio with the addition of approximately 170,000 barrels of oil equivalent per day of high-margin, lower-decline unconventional production in 2024, as well as approximately 1,700 undeveloped locations”. Occidental also outlined that the deal is expected to deliver increased free cash flow on a diluted share basis, “including $1 billion in the first year based on $70 per barrel WTI”. “We believe the acquisition of CrownRock’s assets adds to the strongest and most differentiated portfolio that Occidental has ever had,” Occidental President and Chief Executive Officer Vicki Hollub said in the statement. “We found CrownRock to be a strategic fit, giving us the opportunity to build scale in the Midland Basin and positioning us to drive value creation for our shareholders with immediate free cash flow accretion,” Hollub added. “We are excited about combining CrownRock’s high-performing team into our organization and expect to continue Occidental’s exceptional operational and financial results for years to come,” Hollub continued. CrownQuest Operating Chief Executive Officer Tim Dunn said in the statement, “Occidental’s purchase of CrownRock is a multi-win proposition for CrownRock, our employees and customers, and our community”. “We congratulate Occidental and look forward to seeing their historically successful company continue to grow and prosper,” he added. To contact the author, email andreas.exarheas@rigzone.com
