The shale revolution that began about 15 years ago saw a proliferation of thousands of small-time drillers turn the global energy order on its head and restored the US to the status of world’s biggest producer.
Today, as a multibillion-dollar wave of consolidation washes over the Permian Basin — the engine room of America’s oil industry — that landscape has been transformed. A handful of heavy hitters is now firmly in control.
Diamondback Energy’s $26bn deal for rival Endeavor Energy this week brought to almost $180bn the value of an oil and gas dealmaking spree that has reverberated across the US shale patch since the beginning of last year as big, publicly listed players swallowed rivals.
Just 10 companies will now control more than 6.4mn barrels of oil equivalent a day of the Permian’s output, according to Wood Mackenzie, a consultancy. Six companies will each produce more than 700,000 boe/d — more than some Opec member countries.
Half of the sought-after Midland sub-basin, which makes up the eastern part of the Permian, will be controlled by just two companies: ExxonMobil and Diamondback.
“It’s now a story of bigger companies — not smaller companies,” said Dan Pickering, founder of Pickering Energy Partners, a consulting and investment group. “And that just has a much different cadence and tenor to it.”
In the past four months alone, Exxon has announced a $60bn deal for Pioneer Natural Resources, the biggest producer in the Permian; Occidental has agreed to snap up CrownRock for $12bn; and Diamondback announced its purchase of privately held Endeavor. (Another pending $53bn deal by Chevron for Hess gives the supermajor shale assets in the vast Bakken oilfield of North Dakota.)
The action pushes the Permian into a new era where drilling focused on growth at all costs, which catapulted it into country’s most prolific oilfield, has come to an end.
“It does feel like another turning of the page where shale has gone from an exploratory expansionary phase to a not declining but managed phase,” said Andrew Dittmar, senior vice-president at consultancy Enverus.
Over the past five years, under pressure from Wall Street, publicly owned companies have pulled back from the costly pursuit of volumes and sought to channel cash back to shareholders.
Private operators — less constrained by market demands — drove much of the Permian basin’s growth, responding to higher prices by rapidly raising production. Now, as those companies are absorbed by larger public rivals, the potential for surges has faded once more.
Diamondback said it would remove drilling rigs from the field after its acquisition, while insisting it could keep gradually growing output regardless.
“There is no way the US rig count grows after the recent wave of consolidation by Exxon, Chevron, Diamondback and Occidental,” said Conrad Gibbins, co-head of the upstream Americas business at Jefferies. “That points to one thing, which is we’re headed towards higher oil prices. It’s not a question of if, it’s a question of when.”
That adherence to strict exploration plans suggests the US shale energy industry will shift further away from its role as a swing supplier, able to quickly turn up the production dial to douse price rises as it did early in the boom.
“If Exxon, Chevron, Oxy, Diamondback, etc are going to have a programme that they just plough through and execute on, they are less likely to accelerate when prices are high, they are less likely to slow when prices are low — and that translates to Opec being more important,” said Pickering, referring to the oil export cartel led by Saudi Arabia.
Consolidation will, however, enable producers in the Permian to remain profitable even during commodity slumps. Wood Mackenzie believes operators can shave about $5 a barrel off the break-even costs of drilling that sit at about $30-$35 a barrel in the basin. West Texas Intermediate crude settled at $78 a barrel on Tuesday.
One way of driving down costs is by joining together nearby acreage, enabling companies to operate across large swaths rather than piecemeal parcels. They can extend the length of horizontal oil wells they drill and centralise their infrastructure above ground.
Midland, Texas-based Diamondback said it has about 100,000 acres that touch Endeavor’s. It believes it can extend up to 175 lateral wells to overlap the two companies’ positions, while achieving $550mn in annual cost savings.
“In every deal we’ve ever done, we check our egos at the door, we get in the room with the other side and figure out what’s the best mousetrap on how to drill and complete wells in the space,” said Kaes Van’t Hof, Diamondback’s chief financial officer.
Autry Stephens, who grew Endeavor from a single rig operation almost half a century ago, had held off on selling the company for years. But people close to the deal said he had eventually agreed to sell to Diamondback in part because it would keep the company in Midland, where it is also headquartered.
Exxon has said it will be able to drive $2bn in annual synergies over the next decade through the Pioneer acquisition — largely by using technology to increase oil recovery, but also with longer wells.
“I feel like we had reached a point maybe a year or two ago, before this wave kicked off, where it felt like this is as good as the Permian is going to get in terms of cost and supply break-even,” said Alex Beeker, research director at Wood Mackenzie. “But all these deals have validated that there’s still a lot of efficiency improvements to go.”
For now, companies are focused on getting their transactions over the line. Exxon, Chevron and Occidental’s deals are being studied by US competition regulators.
Analysts do not expect the Federal Trade Commission to block any of the deals. But at some point, said Beeker, the continued concentration of control of America’s oil heartlands could “raise red flags”.
