Oil sector’s ‘hottest zip codes’ see bidding soar on SM deal

Bloomberg

SM Energy Co.’s $980 million purchase of drilling rights in the biggest U.S. crude field indicates producers are willing to pay a premium for access to one of the few spots where oil exploration still turns a profit.
SM, which extracts oil and natural gas from the Rocky Mountains to the Gulf Coast, agreed to pay the equivalent of $39,543 an acre for drilling rights across 24,783 acres in the
Permian Basin, almost doubling
the Denver-based company’s holdings in the region, according to a statement on Monday. SM plans
to deploy a rig as soon as October to drill the acquired acreage, which Chief Executive Officer Jay Ottoson called “top tier.”
After decades of neglect by international oil producers, the Permian Basin that lies beneath West Texas and New Mexico has seen a rejuvenation in the past eight years as intensive drilling and fracking techniques honed in other oil- and gas-producing regions were brought to bear on the Permian’s multi-layered stack of crude-soaked rocks. As low energy prices made other areas unprofitable to drill, explorers as diverse as Apache Corp., Cimarex Energy Co. and Occidental Petroleum Corp. have been touting plans to expand Permian investments.
The Permian’s got “the hottest zip codes in the industry,” Concho Resources Inc. CEO Tim Leach told analysts on an Aug. 3 call. The Midland, Texas-based company focuses solely on the Permian and announced more drilling plans last week.

HIGHER PRICE
SM jumped 6 percent to $31.06
at the close in New York, after
earlier reaching $32.43, the highest intraday price since June 10. The shares have risen almost 60 percent this year.
SM’s agreement “demonstrates continued high acreage values” in the Permian and “validates” recent acquisitions in the region by Diamondback Energy Inc. and Callon Petroleum Co., Jeff Grampp, an analyst at Northland Securities Inc., said in a note to clients. It’s also a positive development for other Permian drillers such as Earthstone Energy Inc., Parsley Energy Inc. and RSP Permian Inc., he said.
The per-acre price SM is paying exceeds the $25,000 to $35,000 range that acreage in the Permian’s Midland Basin section had been fetching as recently as May, according to estimates by Mike Wichterich, president of Three Rivers Operating Co., a private equity-backed explorer. QEP Resources Inc. forked over about $60,000 an acre to unnamed sellers for a tranche of Permian drilling rights in June, a signal that deal values in the region are at “an all-time high,” Eli Kantor, an analyst at Iberia Capital Partners LLC, said in a July 26 note to clients.