San Antonio Express-News (Sunday)
ConocoPhillips flips script with Permian deal
ConocoPhillips CEO Ryan Lance has long resisted major acquisitions, saying in 2019 that they’re “destructive” to value and returns.
At the time, the Houston oil giant’s rival Occidental Petroleum had just outbid Chevron to acquire Anadarko Petroleum in one of the biggest oil and gas deals in years. Although ConocoPhillips would have desired a larger presence in the Permian Basin of West Texas, Lance said he wouldn’t overpay.
“It’s quality over quantity,” he said then. “We certainly don’t have as much acreage as some of our competitors, but we’re in the heart of the (Permian’s) Delaware (Basin).”
Two years later, Lance is doubling down on the prolific shale field with its $9.5 billion acquisition of Royal Dutch Shell’s Permian business. The deal, which comes less than a year after ConocoPhillips put down $13.3 billion in stock to gobble up Midland-based Concho Resources, is a bold bet on the future of shale after the worst oil bust in a generation. The all-cash transaction, expected to close this year, will strengthen ConocoPhillips’ position as the largest independent oil and gas producer in the country and one of the biggest players in the Permian, the nation’s top oil field.
Shell’s Permian assets include about 225,000 acres of nonfederal land near ConocoPhillips’ operations, as well as more than 600 miles of oil, natural gas and water pipelines to support production. ConocoPhillips estimates that 2022 production from Shell’s Permian assets will be about 200,000 barrels per day.
“Conoco is making a major
commitment to shale in this deal and in particular the Permian Basin,” said Andrew Dittmar, senior mergers and acquisitions analyst at Austin-based research firm Enverus. “That is an area that lagged in Conoco’s portfolio for years but has recently leapt to the forefront of its long-term plans.”
ConocoPhillips’ Permian ambitions, however, come as industry giants have pledged to maintain austerity in an effort to woo back Wall Street investors in the wake of the pandemic-driven oil crash. Although oil prices have climbed back to more than $70 a barrel — a level at which oil companies can make a healthy profit — oil giants remain restrained in their spending,
instead focusing on returning cash to shareholders through higher dividends and share buybacks.
ConocoPhillips’ deal with Shell is the largest all-cash exploration and production deal in three years, Enverus said, and a departure from most energy deals since the pandemic that have been funded largely or entirely with company shares. All-stock deals, such as ConocoPhillip’s earlier deal with Concho, allow oil companies to acquire companies and assets without taking a hit to their balance sheet.
Lance in a conference call with analysts Tuesday morning defended his latest deal, arguing that the Permian wells and pipelines
it is buying from Shell will help pay for larger shareholder dividends. At the same time the Shell deal was announced, ConocoPhillips increased its quarterly dividend to 46 cents per share from 43 cents. The company this year expects to return $6 billion, or about 8 percent of its market value of $79.5 billion, to shareholders. Even after paying for Shell’s Permian assets with cash, ConocoPhillips expects to end the year with $4 billion on its balance sheet.
“We’re walking the talk, you know. These aren’t just words that are coming out of our mouth,” Lance said Tuesday. “We’re following exactly what we’ve told our shareholders and returning a significant amount of the capital back to our shareholders.”
For Lance, the chance to pick up desirable Permian acreage at a bargain during the pandemic may have been too alluring to pass up, despite the industry’s promises to maintain financial discipline.
ConocoPhillips will pay about $15,600 per acre for Shell’s Permian land, a quarter of the nearly $60,000-an-acre Occidental Petroleum paid for Anadarko’s Permian position in 2019. Shell’s acreage is also only slightly more expensive than what ConocoPhillips paid for Concho’s Permian position this year, around
$10,000 an acre, according to Enverus.
“After waiting patiently on mergers and acquisitions opportunities through the land-rush years of the shale boom, Conoco has been able to pick up prime Permian real estate at what looks to be attractive price points,” Dittmar said. “Besides a general cooling in the market for shale acreage, Conoco’s ability to pay cash in a deal of this size likely contributed to nabbing the assets at an attractive price point.”
Moreover, Shell is leaving its most productive acreage in the Permian for ConocoPhillips to develop, according to Allegra Dawes, an analyst at New York investment research firm Third Bridge. ConocoPhillips plans to continue to increase oil and gas production by about 3 percent annually.
“At the time that Shell put together its Permian portfolio, the best acreage lacked the necessary infrastructure,” Dawes said. “This leaves the buyer, in this case ConocoPhillips, with the opportunity to exploit the better properties.”