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Supermajors expected to play 'proactive role' in Permian consolidation

The next big shale deal between an integrated oil and gas company and an independent producer could involve one of the Permian Basin's biggest players, according to private equity investors and industry experts.

Lower stock valuations of Permian drillers has many an the industry anticipating another shale M&A spurt. Given that supermajors including Exxon Mobil Corp. and Chevron Corp. are expanding their operations in the prolific Permian, several industry experts at CERAWeek by IHS Markit called out the natural fit.

"I think it's very likely that someone like Diamondback, like Concho, aggregates a bunch of [assets] and sells the whole thing to Exxon," Yaupon Capital Management LP managing partner Steve Pattyn said at the conference.

Diamondback Energy Inc. became one of the largest producers in the Permian with its $9.2 billion acquisition of Energen Corp. in 2018 and other independents like Concho Resources Inc. followed suit.

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Blackstone Energy Partners CEO David Foley (left) and Credit Suisse Chairman of global energy Osmar Abib Jr.

Source: S&P Global Market Intelligence

Global supermajors have already started to swoop in and snap up well-run but undervalued shale drillers. BP PLC in October 2018 acquired BHP Billiton Group's Permian and Eagle Ford assets for $10.5 billion. Some industry analysts expect Matador Resources Co., Carrizo Oil & Gas Inc. Callon Petroleum Co., Marathon Oil Corp. and Whiting Petroleum Corp. to become takeover targets as well.

"We would not be surprised this year or next year if we start to see the integrated [companies] playing a more proactive role in public consolidation in the Permian specifically," Matt Portillo, managing director of E&P equity research at energy investment bank Tudor Pickering Holt & Co., said.

In order for upstream M&A to take off, Blackstone Energy Partners senior managing director and CEO David Foley said share prices will have to reflect the positive value of those deals. "You're going to need to see a couple of these deals happen where the stock … doesn't plummet afterward," he said. "It seems like virtually every single deal over the last nine months in the upstream … the stock went down."

Companies do not blindly pursue inventory since attractive M&A targets have "to be better than what you already have," according to Credit Suisse global energy chairman Osmar Abib Jr. Pressure from investors across the sector to pivot away from high-cost growth should help to illuminate potential acquisitions as free cash flow and capital discipline become benchmarks of success.

"A lot of light has been shed on the industry, and I think investors have quite frankly pushed a lot of companies out on the ice, and some of them will fall through," Portillo said. "Every company has been asked to have the same business model and that's not just something that’s going to be sustainable."