Need for flex continues to drive Permian M&A [Gas in Transition]

As explained back in 2020, the on-going M&A in the US Permian is linked to the desperate need for major companies to get hold of flexibility in an energy transition world, where the forecasts are more and more difficult to establish. 

The Permian has again proven to be extremely flexible; in 2023, yearly hydrocarbon production grew by another 11%. Concentration therefore continues to be the focus here with big oil understanding the value of the Permian. The company ranking changed slightly with Diamondback taking over Devon, Coterra taking over APA and Permian Resources taking over Ovintiv.

Permian hydrocarbon production

Source: US DoE, thierrybros.com

With 11% growth in the Permian, Chevron stays the leader for a second and final year. In 2024, with ExxonMobil’s acquisition of Pioneer and the merger between Diamondback and Endeavor, Chevron should move down. 

ConocoPhillips and Pioneer (for its last year in the ranking) both recorded a 10% growth in Permian production in 2023 versus 2022. 

ExxonMobil growth has been extremely high and resilient in the past few years, with another 13% increase in 2023 versus 2022. This clearly shows that ExxonMobil is valuing this asset more than any other worldwide. The October 2023 announced $59.5bn merger with Pioneer will allow ExxonMobil, at closing, to more than double its Permian production to 1.3mn boe/d with “an expected increase to approximately 2mn boe/d in 2027.” This proves that, as expected, it is easier and safer for major US companies to concentrate on US unconventional production versus conventional production outside the US for both security and flexibility.

After a strong 28% growth in 2022, EOG “focused on shareholder value,” in 2023, and grew its output by 13%.

The $38bn mega Occidental-Anadarko deal that kickstarted the recent consolidation phase back in 2019, allowed Occidental to grow its Permian hydrocarbon production until 2020. For financial discipline, Occidental growth has been below its peers until 2022. In 2023 it managed to grow its production by 14%. And to further boost growth, Occidental is acquiring CrownRock for $12bn, which should add 170,000 boe/d after closure.

After the 2022 FireBird and the 2023 Lario Oil & Gas acquisitions, Diamondback’s production grew in 2023 versus 2022 by 16%, overtaking Devon. In February 2024, Diamondback and Endeavor merged to create “the must-own Permian pure play.” And with 816,000 boe/d, the new Diamondback should rank second in Permian production just after ExxonMobil (1.3mn boe/d) and in front of Chevron and Occidental.

Devon’s Permian production grew by 3% in 2023 as the company focused, as expected, more on profitability instead of growth. 

Coterra grew its production by 10% and managed to overtake APA.

APA data are indicative, as the company reports only its full US output, but operates primarily in the Permian Basin in West Texas and New Mexico. APA also has operations located in the Eagle Ford shale and Austin Chalk areas of Southeast Texas, offshore in the Gulf of Mexico, and along the Gulf Coast in South Texas and Louisiana. On January 4, APA and Callon entered into a definitive agreement under which APA will acquire Callon in an all-stock transaction valued at approximately $4.5bn, inclusive of Callon's net debt. The news was entitled “Accretive Permian transaction.”

With the closing in November 2023 of the Earthstone Energy acquisition, Permian Resources recorded the strongest growth in 2023 with 103% increase versus 2022. For 2024, the company guidance is again for strong growth (between 54-67%). With 2024 production expected above 300,000 boe/d, Permian Resources should move up the ranking again in 2024. 

In April 2023, Ovintiv acquired core Midland Basin assets in a cash and stock transaction valued at $4.3bn that led to a 43% growth in Permian hydrocarbon production on a full year basis. As Permian Resources had a way stronger growth it overtook Ovintiv in 2023.

For its last year in the ranking, Callon managed to grow its Permian production by 13%. 

SM Energy showed another decline in 2023 (-7%). This drop was compensated by growth in South Texas.

In June 2023, Civitas Resources acquired oil and gas operations in the Permian basin managed by private equity firm NGP Energy Capital Management for $4.7bn, expanding its operations into the lucrative shale patch. The deal is transformative for Civitas, which until now operated solely in Colorado's Denver-Julesburg basin. This allows Civitas Resources to appear on this Permian ranking. On top, with the closing in January of the agreement with Vencer Energy to acquire oil producing assets in the Midland Basin of west Texas for another $2.1bn, Civitas Resources’ Permian production is expected to grow to 170,000 boe/d in 2024, overtaking SM Energy.

Permian hydrocarbon production by companies

Source: companies (BP not included because it does not provide specific Permian numbers), thierrybros.com

Companies need flexibility on the upsides and downsides to be able to cope with whatever happens in the medium term. Outside OPEC+ spare capacity, the Permian alone seems to be able to provide this in a fast and affordable way; hence the financial consolidation and the production growth should continue. Going forward, the global players with a strong foothold in the Permian would be able to produce baseload, as usual, their conventional assets and to match any unexpected /unforecastable swing in demand thanks to shale oil. Permian will be used going forward to cover the many energy transition hiccups. As we can expect a lot of hiccups, the value of Permian will continue increasing and the production should continue growing thanks to more pipeline capacity to take oil and gas production to demand centres. With massive differences in OPEC and IEA world oil growth forecasts for 2024 alone (+2.2 mb/d and +1.2 mb/d respectively), the value of flexible production is paramount.

The war in Ukraine benefits the US Permian as it is safer to get oil and gas from a trusted Western country than from a non-democratic regime. With Pioneer, CrownRock, Endeavor and Callon soon merged into ExxonMobil, Occidental, Diamondback and APA respectively, the ranking will change again in 2024.

Warren Buffet provides the best way to frame the value of US production: “And then – Hallelujah! – shale economics became feasible in 2011, and our energy dependency ended. Now, US production is more than 13mn boe/d, and OPEC no longer has the upper hand. Our country would be very – very – nervous today if domestic production had remained at 5mn boe/d, and it found itself hugely dependent on non-US sources.”

Dr. Thierry Bros

Energy Expert and Professor

February 28, 2024