Oil companies keep paying for Permian land; ‘High-water numbers,’ analyst says

Apache operations in West Texas.
Apache operations in West Texas.

Oil companies continue buying acreage in West Texas’s prolific Permian Basin.

This time, it was Denver’s SM Energy, announcing Tuesday it was picking up 35,700 acres in Howard and Martin counties, north and east of Midland, from private-equity backed and Houston-based QStar for $1.6 billion in cash and stock. The deal included 2,400 barrels per day of existing oil and gas production and works out to at least $42,000 per undeveloped acre, analysts said, stacking the purchase up among top prices this year.

It’s the second big announcement in a week. Last Thursday, Dallas-based RSP Permian bought Silver Hill Energy Partners, also headquartered in Dallas, and its 41,000 acres for $2.4 billion, or as much as $47,000 per undeveloped acre, according to some analysts.

The investment banking firm Piper Jaffray called the purchase another among “transformational acquisitions” this year.

The two announcements again show how U.S. oil companies, regardless of the slump in oil prices, are fighting to get into the oil-rich Permian Basin, even as they pull rigs from other fields. They also show how much companies are willing to pay.

“The Permian is so hot right now,” said Ben Shattuck, an analyst with the energy research firm Wood Mackenzie. “These are high-water numbers.”

The Permian Basin’s two sections, the Midland and the Delaware, are the most competitive markets in the country in tight oil right now, he said.

RSP’s buy was in the Delaware, the Permian’s western lobe. There, year-to-date transactions have averaged $14,400 an acre, Piper Jaffray said ­— about $30,000 less than what RSP paid.

It’s the second big Permian purchase for SM Energy. Just two weeks ago, the company bought Denver- and Houston-based Rock Oil Holdings and its 24,783 acres in Howard County for $980 million.

The two buys together buoyed SM’s Midland Basin footprint to 82,450 acres. Moreover, much of the land is contiguous, allowing the company to drill longer horizontal wells and get out more oil.

At the same time, SM Energy has pulled rigs from the Eagle Ford formation, west of Houston, and is now dumping its acreage in North Dakota’s Williston Basin, too.