Upstream acquisitions and divestitures continue as producers work to optimize and expand acreage, with notable activity in the Permian as well as the STACK. Permian acquisitions have been particularly abundant, with at least four separate announcements in August alone, and Callon Petroleum (NYSE: CPE) and EOG (NYSE: EOG) announcing additional acquisitions this week. Producers often tout breakeven prices based on half-cycle economics, which don’t consider acreage acquisition costs as those expenditures are considered sunk costs. But with all these new announcements the question becomes: will producers earn a return on these acquisitions?
BTU Analytics has taken a closer look at comparing the recent acquisition costs in the Permian and STACK. To compare the costs on an apples-to-apples basis, they must be normalized in some fashion. While implied value per net acre is a standard measure commonly quoted, implied value per drilling location could be considered more relevant when evaluating acreage with stacked pay potential.
For the calculations below, the implied value per net acre first backs out the value for PDP. PDP value is often directly reported by companies announcing transactions.
The value per drilling location is also calculated below. This also gives further granularity on the value of the acquisition on essentially a well level. In the table below, value per location was calculated in two ways: (1) by using a set of very conservative, standardized assumptions for number of horizons, lateral length and spacing for each play in the acquired area and (2) by using what producers have reported as potential drilling locations in the acquired area.
Given the variance of the number of horizons producers are indicating they can target, as well as spacing and lateral length, there is a difference between the standardized locations and producer reported locations, with producer reported locations generally being greater. The average acquisition value for the Permian is between $1.1 to $3 million per location. To put in perspective, typical D&C costs, which are factored into half-cycle analysis, are about $6 million per well.
Along with the Permian, there has been recent interest in the STACK. A similar table for recent acquisitions in the STACK is below.
The average acquisition value for the STACK is about $1 million/location, using both standardized assumptions as well as producer-reported locations. This is lower than that for the Permian, though still significant.
The Permian and the STACK are both areas that provide attractive growth opportunities for producers. M&A activity will continue in these areas as producers look to establish and grow positions in plays deemed likely to factor into the North American supply stack no matter what commodity price environment lies ahead. But given that some of the recent acquisitions seem to be pricing in significant upside potential, time will tell whether buying at today’s purchase prices are good strategic moves or ill-advised actions in a frothy market. For additional analysis on the Permian and SCOOP/STACK, check out the E&P Positioning Report as well as the Upstream Outlook.
