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$9.5B Concho deal could be starting gun in Permian consolidation sprint

Concho Resources Inc.'s announced $9.5 billion purchase of RSP Permian Inc. may be the start of a new era: Instead of buying up acreage to exploit later, publicly traded companies already producing oil in the Permian could be more interested in buying one another.

The Permian, an oil-rich play centered in West Texas, is unusual in that operators like Concho, RSP and Diamondback Energy Inc. moved quickly into the unconventional portions of the play and snapped up acreage before larger competitors could. With the best acreage under lease and companies moving beyond the exploration stage, larger buyers are now looking to snap up both acreage and operating wells.

"The days of public E&Ps buying pure acreage deals could be mostly behind us with the focus now turned to buying companies with strong acreage and production," SunTrust Robinson Humphrey energy analyst Neal Dingmann said. "Our market research of Midland operators has suggested that private acreage operators are having difficulty obtaining strong bids, and today's deal partially confirms this thesis."

Dingmann suggested other companies of similar size to RSP that also have good acreage and production numbers could also be targeted by unsolicited offers. Companies like WPX Energy Inc., Energen Corp. and Matador Resources Co., he said, fit the description.

Concho said it would pay approximately $9.5 billion for RSP's position in the Permian, plus assumed debt, which a Jefferies LLC analyst estimated as $76,000 per acre, or a 29% premium. That was considerably more than other recent deals in the basin, but the quality of RSP's already-producing acreage made it stand out.

In its comments on the deal, Wolfe Research agreed that consolidation in the Permian will likely continue now that Concho has started the ball rolling. Other producers, looking to expand both their acreage holdings and production totals, will likely follow suit.

"We believe investor attention will turn to further consolidation amongst the Permian pure-plays. … [T]he transaction shows us there is a focus on combined core acreage positions with scale and synergy opportunities on multiple fronts, not just adding acreage to gain a larger foothold," the firm said. The larger the asset base, Wolfe explained, the easier it will be for a company push costs lower in negotiations with increasingly busy oilfield services companies.

Williams Capital Group said Concho's move to obtain RSP was not a surprise, as the company had the right combination of acreage and production while trading at a discounted valuation. Other Permian-only companies operating in the center of the play, analyst Gabriele Sorbara said, may also find themselves targeted for M&A activity.

"Should industry consolidation pick up, we expect it to be centered in the core areas of the Permian Basin," he said, adding that the transaction was "a positive read-through" to peers like Energen, Diamondback, Lilis Energy Inc., Parsley Energy Inc. and SM Energy Co.