Big Oil circles Permian Basin riches

A bloodbath in energy stocks is creating a rich opportunity for Big Oil to dominate America’s hottest shale play.

Independent producers in the Permian Basin of Texas and New Mexico are trading much lower than when Chevron bid for Anadarko Petroleum in April. Royal Dutch Shell and ConocoPhillips have expressed interest in bulking up in shale at the right price.

Exxon Mobil’s chief said Wednesday his company is keeping a “watchful eye” on the Permian for potential deals.

Oil’s drop to near $55 per barrel, from $75 in October, is putting pressure on shale producers at a time when investors are losing faith in an industry that has burned about $200 billion of cash in a decade. Despite record U.S. output, the S&P index of independent exploration and production companies is trading near its troughs of 2008 and 2015, when crude prices sank south of $35 per barrel. The producers are now worth just 4.5 times their earnings before certain items, compared with nine times about a year ago.

“It’s clear there are many E&Ps trading well below the Chevron valuation watermark from April,” said Michael Roomberg, who helps manage $4.4 billion at Miller/Howard Investments Inc. He expects “several additional deals over the next several quarters, and wouldn’t be surprised if the majors are involved.”

Pioneer Natural Resources Co. or Concho Resources Inc., which have both struggled this year, would be a good fit for Exxon, while Shell may look at smaller players such as WPX Energy Inc. and Cimarex Energy Co., according to Tudor, Pickering, Holt & Co.

The collapse in valuations has been so severe, the biggest shale producers may also come into play. EOG Resources Inc. and Occidental Petroleum Corp. could also be targeted, Ben Cook, a portfolio manager at BP Capital in Dallas, said earlier this year. Activist investor Carl Icahn is pushing for a shake-up of the board at Occidental.

After a slow start in shale, Exxon and Chevron have expanded in the Permian at prodigious rates over the past two years and now see onshore exploration in the U.S. as a key part of their global growth plans. They expect to more than double output to roughly 1 million barrels per day each by the early 2020s.

The two heavyweights are betting their ability to fund enormous drilling programs and build associated infrastructure such as pipelines and gas terminals means they won’t encounter the growing pains the independents are currently experiencing.

“If there is the opportunity to acquire something that brings unique value to Exxon Mobil, we will be in a position to transact on that,” Exxon CEO Darren Woods said at a Barclays conference Wednesday.

But he’s willing to let potential targets struggle for some time to get a better price.

“Time’s on our side to let that play itself out,” Woods said. “I think people need to recalibrate what they’re experiencing in that unconventional space, and that will have an impact on how people value companies.”