Disruptors and Their Combustibles - Deal making In and For the Permian Basin

Lucid Energy Group announced on Monday, January 8, that it has sold part of its natural gas processing and pipeline infrastructure (Lucid II) for $1.6 billion.

Lucid II will retain its name and will operate as a portfolio company of the buyers, Riverstone Holdings and the Goldman Sachs Merchant Banking Division.

The assets involved are part of the vast ecosystem that has grown up in recent years atop the Permian Basin, in west Texas and eastern New Mexico, south and west of Lubbock. Gary Sernovitz, author of The Green and the Black, says fittingly of the Permian that it is “less a single play than a jamboree of shale plays.” The Lucid deal was a fitting kick-off of a New Year in which there will be a good deal of music emanating from that jamboree.

The Big Picture

One of the big divides in the oil industry of late has been: where to go as conventional sources of crude are exhausted, out to deepwater or into the shale?  Back in 2016 (which, yes, seems ages ago already) there were $40 billion of deals in which the buyers were answering “into the shale!” constituting a Permian Basin land rush. In the first three quarters of 2017, though the number of land deals increased, the total value of those deals fell, with a tapering off of the “megadeals.”

Recall that Henry Hub prices of natural gas started 2016 by crossing the $3 mark on the way down. The price hit its recent low of $1.57 in March 2016 and gained ground steadily through the remaining three quarters of the year, helping to encourage those land-rush deals, and getting to $3.71 in December.

Last year, 2017, was a different story. Mostly it was a more placid story. The price fell back to $2.54 in February and … stayed down there, month after month. By the end of the year’s third quarter, it had only gained $0.30 from that point.

The end of 2017, though, was more dramatic in pricing, and may have helped set off mega-deal excitement again for the Permian Basin in 2018. In December, ATX Energy Partners announced a commitment of up to $780 million from an investment consortium including Warburg Pincus.

In addition to Lucid’s sale, the first days of the New Year saw NGP announcing a partnership with Luxe Minerals to “leverage [their] technical expertise and large-scale data analytics” in exploiting the several basics, Midland and Delaware (both within the Permian) among them.

Two Months Further On

Almost two months into the New Year, and the Permian continues to develop its own ecosystem, which entails attracting supportive products and services. For example: National Oilwell Varco (NOV) says it has developed a cost-effective upgrade package for the TDS-11SA.

The TDS (Top Drive Solutions) is a line of motor systems to be hoisted on the derrick or mast of a drilling rig. NOV says that it has come out with a new upgrade kit because it recognizes that contractors in the Permian basin often don’t want to purchase “entirely new equipment” due either to cost cutting pressures or the down time that would be necessary for a new build. Thus, the TDS-11SAE, an upgrade package, works with the existing top drive to elevate performance “beyond standard levels.”

Looking to the Majors 

It has been a long time since the idea of getting oil out of such basins as the Permian was thought to be a fringe idea of ‘disrupters.’ That most mainstream of all oil companies, ExxonMobil, now says that it expects that it will triple its output from the Permian by 2025, which would put the average daily production above 600,000 barrel of oil equivalents (boe).

ExxonMobil has a large and contiguous acreage in the Permian. Since early 2014 it has doubled the footage drilled per day figure in the area and it has reduced its per foot drilling costs by roughly 70%. It also acquired the Bass companies a little more than a year ago, for $6.6 billion, thereby doubling at a stroke its assets in the Permian. Sid Bass directly negotiated the matter with the oil giant’s then CEO, Rex Tillerson, who is now of course the U.S. Secretary of State.

Relatedly, ExxonMobil says it will spend more than $2 billion on creating the infrastructure necessary for its expanding operations.

And a Mining Giant

Meanwhile, the world’s biggest mining company is trying to sell its U.S. shale unit, and this may have an impact on the Permian. Melbourne-based BHP Billiton bought the shale assets in 2011. That move caused dissension among BHP’s investors, dissension stoked by the hedge fund Elliott Management Corp.

Paul Singer of Elliott charged that the purchase was a distraction from BHP’s core business, and a very highly priced distraction at that (BHP spent $20 billion on the over-all US shale deal). The company’s CEO, Andrew Mackenzie, has admitted there is a point to this charge, saying that the space is so crowded that the company would have to “move heaven and earth to try and ensure that we were absolutely best in class in the shale assets that we’ve chosen to retain” in order to justify the price it paid.

Since moving heaven and earth is tricky, BHP is prepared to chop the shale unit up into seven parts in order to facilitate its exit. If it does, then three of the seven parts will be Permian plays.

Finally … Shell

Yet it may not have to do anything quite as drastic as that. Royal Dutch Shell indicates that it might buy the whole kit-and-caboodle.

At International Petroleum Week in London, Shell’s upstream director Andy Brown, said that the company is looking “at opportunities to build up our shale position.”

Let’s get back to the dichotomy: where to go as conventional sources of crude are exhausted, to deepwater or into the shale? Shell for its part is a major deepwater player, and is certain to remain so. Brown’s job, as described on the Shell website, includes responsibility for “the exploration and production of oil and gas from conventional, shale and deep-water sources.”

Brown made his own reputation in the oil and gas diplomacy of the Middle East, and in fact is the recipient of an OBE for his advancement of the cause of British-Qatari relations. Qatar would count as a “conventional” source.

But if Brown and Shell are serious about this purchase from BHP, then they are clearly answering the “deepwater/shale” query: “both!”