Delaware Basin Could Become the Dealmaking Lure Within the Permian

Analysts believe Diamondback Energy and Parsley Energy could be among the possible buyers interested in bolstering their drilling inventories.
By Tom Terrarosa ,

This article originally appeared in The Deal, a sister publication of TheStreet.com focused on deals and dealmakers, on July 5. For more information about The Deal click here.

It's becoming an increasingly popular premise that as oil companies dig themselves out of a hole, strategic players will look to make deals involving assets in the Delaware Basin, the less developed sub-basin of Texas' lucrative Permian Basin.

On Tuesday, Canaccord Genuity Inc. analysts reiterated their rally cry for the Delaware basin, which has traditionally been a more difficult geological play and had underdeveloped infrastructure when compared to another Permian sub-basin, the Midland Basin, according to industry bankers.

"After meeting with several private operators, we reiterate our belief that the southeastern Delaware will be the focus of Permian transaction activity."

Diamondback Energy Inc. (FANG) - Get Report and Parsley Energy Inc. (PE) - Get Report were among BMO's list of most likely dealmakers in the southeastern Delaware, "conceivably" followed by RSP Permian Inc. (RSPP) , Concho Resources Inc. (CXO) - Get Report and Cimarex Energy Co. (XEC) - Get Report .

"Possible buyers looking to bolster drilling inventories should be enticed by well results that are already solid, yet should have more upside than the more mature Midland Basin. Infrastructure also appears rather well-developed," the analyst noted. "On the other hand, potential sellers are nearly all private equity-backed, making deals all the more likely."

Among the three aforementioned Midland Basin mid-caps, Canaccord believes that RSP Permian is the least likely "to take the plunge." Between Concho and Cimarex, large-cap Delaware players, the firm sees Concho as the more likely dealmaker.

Diamondback Energy, Parsley, RSP Permian, Concho and Cimarex officials did not respond to requests for comment.

But industry bankers are less certain that deal activity in the Delaware will come to fruition on a grand scale in 2016, citing a consistently wide bid-ask spread between Permian buyers and sellers.

Many public Permian operators are trading at 65% to 75% premiums to the U.S. benchmark West Texas Intermediate crude futures strip, according to one banker who requested anonymity, while potential buyers continually seek prices nearer to WTI strip levels for assets in the basin.

Private players' inability to get a deal done is evidenced by the recent initial public offering registration filing of Natural Gas Partners LP-backed Centennial Resource Development Inc., according to the source, which is likely to be the first of its kind for an oil and gas producer in between 12 and 18 months.

"No one else can pay for them, so why not go the route of an IPO?" this person said. "The Delaware is hot, you've got good assets, a good management team, so the thought is, 'Why don't I go recognize my exit via [an IPO]?' "

Occasional deals could shake out near-term for Permian players like Parsley and Diamondback, the source acknowledged, but this person said the pipeline of deals is not likely to pick up substantially until the spring of 2017, especially considering the possibility of another drop in oil prices as production comes back online globally in Canada and Nigeria.

Still, Canaccord believes that the Centennial IPO, which it predicts will be well-received by the market, "could entice public companies to snatch up Delaware privates in advance of [future] potential IPOs."

The names of potential private equity-backed IPO candidates and acquisition targets in the Delaware have been bandied about in recent reports. Energy-centric firms like Warburg Pincus LLC, Quantum Energy Partners LP and Kanye Anderson Capital Advisors LP have been mentioned regularly. Warburg Pincus invested in Delaware operator Brigham Resources in 2013, while Quantum Energy's Jagged Peak Energy LLC owns assets in the Wolfcamp play in the southern Delaware Basin.

Bankers noted that Quantum and Kanye Anderson both back a number of operators with properties in the Delaware sub-basin and throughout the Permian, and one source pointed to this as another possible barrier to entry for private equity-backed players.

Warburg Pincus, Quantum Energy and Kayne Anderson officials could not be reached for comment.

The source expects that in the next 12 to 18 months, many of these private equity-backed players will be forced to put their dry powder to work on deals.

If not, the theory that IPOs could pick up as soon as this later this year could prove true, as the source notes another exit strategy for private equity firms is to roll up the assets from multiple portfolio companies within the same basins into one entity. Then, after releasing all but one management team, it will be brought to the public market.

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