Need for flex continues to drive Permian M&A

As explained back in 2020, the ongoing merger and acquisition (M&A) flurry in the US Permian basin can be explained by the desperate need of major companies to acquire assets with production flexibility, given how difficult the energy transition has made forecasting.

In a few years, many independent companies have disappeared during the Permian's consolidation, including Anadarko (bought by Occidental in 2019), Concho (bought by ConocoPhillips in 2021), Jagged Peak Energy (bought by Parsley in 2020), Noble (bought by Chevron in 2020), Parsley (bought Pioneer in 2021), QEP (bought by Diamondback in 2021) and WPX (merged with Devon in 2021). And some also changed their names. Finally, Shell, which is not disclosing its Permian production (like Apache, BP[1] and Endeavor), sold its business there to ConocoPhillips.

The Permian has proven to be extremely flexible in production terms, with hydrocarbon output falling by 1.4mn barrels of oil equivalent/day, or 17%, in just two months between March and May 2020. In 2021, while negatively impacted by the freezing temperatures in February, yearly hydrocarbon production grew by 5%. And the growth is continuing with oil and gas production exceeding 5mn boe/d and 20bn ft³/d respectively since January 2022.

Permian hydrocarbon production

Source: US DoE, thierrybros.com

Pioneer Natural Resources managed to grow its Permian production by 68% in 2021 versus 2020 thanks to its acquisition of Parsley[2] and DoublePoint Energy[3] in 2021. This impressive growth is allowing Pioneer to top our ranking in 2021. Pioneer does not expect a significant growth of its production in 2022[4], however, and its CEO has warned that US shale lacks the capacity to balance currently tight (and tightening) oil markets, amid multi-year high prices.

After the acquisition of Noble Energy in October 2020, Chevron is a close second in the Permian with a 6% production growth in 2021 versus 2020. Chevron is meanwhile expecting a 10% growth[5].

The $38bn mega Occidental-Anadarko deal that kickstarted this consolidation process back in 2019 allowed Occidental to grow its Permian hydrocarbon production until 2020. But as expected[6], Occidental witnessed a severe drop in Permian production of 15% in 2021. Occidental is the only company that witnessed such a drop in Permian flow that year. The company's guidance[7] envisages a return to growth of up to 10% in 2022.

ExxonMobil's output has rapidly expanded in the past few years, with a 25% increase achieved in 2021 alone. This clearly shows that ExxonMobil is valuing this asset more than any other worldwide and explains its divesting of less strategic [8] assets. This high growth is allowing ExxonMobil to move up to fourth place.

ConocoPhillips completed its acquisition in January 2021 of Concho Resources and began to integrate the Shell Permian position from December 2021. The Concho transaction increased ConocoPhillips Permian position by a factor of five and allows ConocoPhillips to move up to fifth place. As the accounting close date used for reporting purposes of the Shell transaction is December 31, 2021, we should expect further high growth in 2022.

In January 2021, Devon closed its merger with WPX Energy. This "bold strategic consolidation" allowed Devon's Permian output to reach a record growth of 130% in 2021 versus 2020, thanks also to new wells that achieved first production.

After the 2021 acquisitions of Guidon[9] and QEP Resources[10], Diamondback's production grew in 2021 by 19%.

On October 1, 2021, Coterra announced the successful completion of the combination of Cabot Oil & Gas and Cimarex Energy. As the Permian production was coming mainly from Cimarex, we have replaced Cimarex with Coterra.

Permian hydrocarbon production by company

Sources: company data (Apache, BP and Endeavor are not included because they do not provide specific numbers of Permian output), thierrybros.com

Companies need to have access to flexible assets for when the market is experiencing an upturn or a downturn. Outside OPEC's spare capacity, the Permian alone seems to be able to provide this in a fast and affordable way; hence the consolidation should continue. Going forward, the global players with a strong foothold in the Permian will be able to produce baseload supply with their conventional assets and match any unexpected swings in demand with shale oil flow. The Permian will be used going forward to cover hiccups in the market as the energy transition continues. As we can expect a lot of hiccups, the value of Permian is going up.

The Ukraine invasion is resetting the geopolitical landscape and should push the EU to revisit its failed energy policy by increasing its diversification of supply. The US Permian could benefit from this new landscape.

Dr. Thierry Bros

Prof Sciences Po & Energy Expert

March 1, 2022