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US shale operator Permian Resources announced on Monday it will buy Earthstone Energy in an all-share transaction valued at $4.5bn including debt, as dealmaking picks up among upstream producers in search of better inventory.
The acquisition of the oil and gas producer will strengthen Permian’s operations in the Texas shale patch and in New Mexico, increasing its assets by more than 400,000 acres and production by 70 per cent to 300,000 barrels of oil equivalent per day.
The deal will consist of 1.446 shares of Permian’s common stock for each of Earthstone’s common stock.
The announcement comes as the flow of mergers and acquisitions returns to the upstream oil and gas sector, with producers sitting on record levels of cash looking to shore up more drilling sites.
US upstream M&A activity reached $24bn in the second quarter, up 167 per cent from a slow first quarter and the highest since 2021, according to Enverus. The energy research firm tracked 20 deals in the second quarter, with more than a quarter of them topping $1bn.
Andrew Dittmar, director of Enverus, said the need for public buyers to secure quality drilling inventory in the Texas shale patch had been “brewing”. “The pressure to make a deal has been mounting as the remaining opportunities are narrowed with each successive transaction,” he said.
Chevron’s $6.3bn purchase of Nasdaq-traded PDC Energy in May, one of the largest deals during the second quarter, boosted the supermajor’s oil and gas reserves in Colorado.
Chevron’s and Permian’s acquisitions deviate from the dominant dealmaking route of public companies pursuing private-equity backed operators. The deals suggest that public company acquisitions will become more common as private operators with attractive valuations and large inventories become harder to find.
“It’s a race to consolidate the Permian,” said Matthew Bernstein, shale analytics manager at Rystad Energy, an energy consultancy. He added: “As far as a real large public-to-public merger goes [in the Permian], this is something we haven’t seen yet so far this year.”
The acquisition of Earthstone is expected to propel Permian into the top ten producers in the prolific Texas shale patch.
Shares in Earthstone jumped more than 9 per cent in pre-market trading on Monday, while those of Permian were down 3.4 per cent.
US crude oil and dry gas production are expected to reach record highs this year, according to the Energy Information Administration. While output is rising, growth is decelerating as drilling sites become harder to find and public operators prioritise shareholder returns over capital spending.
Annual US crude production will grow by 850,000 barrels per day in 2023, according to the EIA, down from the record 1.6mn b/d production increase seen between 2017 and 2018
