Colgate Energy increases Permian holdings with Luxe Energy purchase

Colgate Energy Partners III said June 2 it would acquire the majority of assets held by Luxe Energy, the latest in a recent wave of combinations by smaller oil and gas producers.

This transaction, which closed June 1 with the signing of the agreement, comes on the heels of the combination of several small upstream producers seeking to scale up operations and cut costs.

The Colgate-Luxe deal will create one of the largest private exploration and production companies operating in the Permian Basin, with about 57,000 net acres, about 45,000 b/d of oil equivalent output, and four rigs operating.

"The acquisition is a perfect fit into the existing Colgate portfolio," Will Hickey, co-CEO of Colgate, said in a statement. "The large contiguous position sits right in Colgate's backyard, and its Ward County position will compete for capital immediately."

Colgate said in its statement, "the transaction adds significant production and cash flow without assuming any additional debt."

The addition of the Luxe holdings brings about 22,000 net acres adjacent to Colgate's position in Reeves and Ward counties located in the prolific Delaware Basin, which stretches across Texas and New Mexico, Colgate said. It adds production of about 17,000 boe/d and "cash flow without assuming any additional debt," Colgate said in a statement.

Including Luxe's one oil rig currently running in Ward County, the combined companies will have four rigs operational.

No value was given for the all-stock transaction, but analysts put the price tag in the $1.25 billion-$1.5 billion range based on production priced at $35,000 barrels of oil equivalent and net acreage at $30,000-$40,000/acre, according to S&P Platts Analytics.

Short-term rewards

While longer-term risks exist for the oil and gas exploration sector due to the shift to ESG and lower demand growth, in the shorter term, the oil and gas production sector is becoming more attractive to investors.

Morgan Stanley analysts said in a June 2 research note that signs of "capital flowing back into the space" are evidenced by the $3 billion inflow into energy sector ETFs last week, the largest since 2008, sparked by a deficit in near-term oil markets and improving demand.

"Global observable inventories have drawn at a healthy average rate of [over] 1 million b/d over the past 6 months," Morgan Stanley said. "On top, mobility indicators continue to pick up, particularly in the US and Europe. With demand improving and supply constrained, the market should remain in a deficit, allowing global inventories to normalize during Q3 and supporting prices."

Oil prices have been rising, with Permian Basin WTI Midland averaging $67.97/b so far this week, according to S&P Global Platts assessments. During coronavirus lockdowns, it was assessed at a low of $13.38/b for the week ended April 24, 2020.

Permian Basin leads the M&A pack

The mergers and acquisitions market in US shale plays are hot, according to Rene Santos, a production and supply analyst with Platts Analytics.

In early May, Laredo Petroleum, another Permian producer with operations in the Midland Basin, bought privately held Sabalo Energy for $175 million, and activity in other US producing basins has also picked up.

On May 10, Bonanza Creek agreed to merge with Extraction Oil & Gas in a $2.6 billion all-stock deal between two public operators in the DJ Basin of Colorado, creating a new company, Civitas Resources, when the deal closes in Q3 2021.

"It started very slow this year with only $3.9 billion in deals in the first quarter; however, it exploded in the second quarter and we still have one month to go, with almost $22 billion in deals for a year-to-date total of $25.6 billion, excluding the Colgate transaction," he said.

Santos cited higher oil prices, the opportunity to reduce overhead, and operational synergies due to contiguous drilling opportunities as drivers of the increase in consolidation among oil and gas producers.

"In addition, most of the transactions this year have taken place in the Permian, $15.2 billion out of $25.6 billion total. The Permian is the largest US shale play and also the one with lowest well breakevens, Santos noted.

Platts Analytics expects Permian shale crude and condensate production to average 3.942 million b/d in 2021, before rising to 4.558 million b/d in 2022 as demand recovers and drilling picks up.

Oil drilling rigs in the Permian were 232 for the week ended May 28, of which 222 were horizontal rigs used to create the long laterals necessary to reach large areas of contiguous acreage used in shale oil drilling, according to BakerHughes.

At the end of May 2020, only 148 oil rigs were drilling as the pandemic slashed demand for refined products to 13.039 million b/d, forcing refiners to cut rates.