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Occidental's Asset Cuts After CrownRock's $12 Billion Deal
12/13/2023
- Acquisition Cost: Occidental buys CrownRock LP for $12 billion.
- Expanded Acreage: Gains over 94,000 net acres in the Permian Basin.
- Production Boost: Adds about 170,000 boe/d of production in 2024.
- Cash Flow Increase: Expects $1 billion cash flow in the first year.
- Debt Reduction: Aims to pay down $4.5 billion in debt within a year.
Occidental Petroleum is expanding its reach in the Midland Basin and targeting deeper drilling in the Barnett area through its significant $12 billion purchase of CrownRock LP.
CrownRock, a collaboration between CrownQuest Operating LLC and Lime Rock Partners, is recognized for its prime land holdings in the Permian Basin. This acquisition brings over 94,000 net acres and 1,700 undeveloped drilling spots in the Midland Basin to Occidental's portfolio.
Additionally, the deal is set to increase unconventional production by about 170,000 barrels of oil equivalent per day (boe/d) in 2024. Vicki Hollub, Occidental's President and CEO, highlighted the vast potential of CrownRock's undeveloped lands in a recent analyst call, noting that 80% of these assets are in largely untouched areas.
A key benefit of this transaction is the substantial boost in cash flow it's expected to bring, including an anticipated $1 billion in the first year, assuming oil prices stay around $70 per barrel. This increased cash flow will not only help Occidental reduce its debt by at least $4.5 billion within a year but also supports their plan to raise their quarterly dividend by over 22% to $0.22 per share starting February 2024.
Focus to Midland: Occidental's New Strategy
Occidental Petroleum, before its recent CrownRock purchase, mainly focused on the Delaware Basin area within the Permian Basin for its drilling operations. Richard Jackson, a senior executive at Occidental, shared that about 80% of their cost-effective drilling sites were in Delaware. Now, with the CrownRock acquisition, the company's operations will be more evenly split:
“We now would have 60% Delaware Basin and 40% Midland Basin, balancing this Tier 1 inventory. Also, the Midland Basin production would move from 9% to nearly 30% of our total Permian unconventional production, based on 2023 estimated and combined totals.”
- Richard Jackson
This acquisition is part of a larger trend in the Permian Basin, where there's a rush for mergers and acquisitions due to the limited availability of high-quality drilling sites. In October, Exxon Mobil announced a big plan to acquire Pioneer Natural Resources, focusing on the Midland Basin. Other companies, like Civitas Resources and Matador Resources, are also expanding in the area.
The price Occidental paid for CrownRock is similar to high prices seen from 2017 to 2019. This reflects a trend where the cost of acquiring drilling sites in the Permian Basin is going up. In 2019, Occidental made a similar large purchase of Anadarko Petroleum. The price per acre for CrownRock is close to what they paid for Anadarko.
In October, Exxon Mobil Corp. decided to buy Pioneer Natural Resources for $60 billion, focusing on the Midland Basin.
Similar expansion is seen with other companies like Civitas Resources and Matador Resources in both the Midland and Delaware basins. This is happening because there aren't many top-quality drilling places left in the Permian Basin, a key oil area in the U.S. Due to this, the prices for land and drilling sites are going up. Occidental paid more than $50,000 for each acre when it bought CrownRock.
Drilling Strategies
- Occidental's acquisition of CrownRock brings valuable, low-cost drilling sites into its portfolio, offering more potential from deeper underground targets.
- They plan to enhance the performance of deep Barnett wells within the CrownRock property.
- Early efforts in developing Barnett sites show promising results for Occidental, with new wells performing 34% better than the average in the area, according to Jackson.
- Occidental is also exploring other deep areas like the Strawn, Woodford, and Devonian formations in the CrownRock asset.
- The company sees promising potential in deeper zones of CrownRock, especially in the Barnett formation. This was highlighted in an Occidental investor presentation.
- Additionally, Occidental is considering Enhanced Oil Recovery (EOR) methods, such as CO2 injection, at CrownRock. They have already been running a CO2 EOR pilot project in the Midland Basin for several years.
“Occidental is able to pay more than others for CrownRock, assuming oil prices remain stable and drive material free cash flow accretion in the near term. “
- Truist Securities
Occidental also plans to sell some assets to fund this purchase. Alongside the CrownRock deal, they aim to sell $4.5 to $6 billion worth of assets that are less competitive.
CEO Hollub stated that these sales will only involve their U.S. assets. She emphasized that just because they are selling an asset doesn't mean it's of low quality. It might simply not align with Occidental's current development strategy or financial needs, but could still be valuable for others.
CFO Sunil Mathew expressed confidence in reaching these asset sale targets, which will help in reducing the company's debt.
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Occidental, CrownRock Merger Under Regulatory Review: 2024 Update
CrownRock's 94,000+ net acres acquisition complements Occidental's Midland Basin operations, valued at $12.0 billion. This expansion enhances Occidental's Midland Basin-scale and upgrades its Permian Basin portfolio with ready-to-develop, low-cost assets. The deal is set to add around 170 thousand barrels of oil equivalent per day in 2024, with high-margin, sustainable production.
Baker Hughes Confirms a Third Weekly Decline in US Oil and Gas Rigs
In a recent announcement, energy services firm Baker Hughes stated that U.S. energy companies have decreased the number of operating oil and gas rigs for the third successive week. This development marks the first such consistent reduction since early September. As of October 6, the count for oil and gas rigs, considered a precursor to future production levels, has seen a decline by four, positioning it at 619. This is the lowest figure recorded since February of the preceding year. The overall rig count has decreased by 143 or 19% when compared to last year's statistics.
TotalEnergies kicked off 2024 with a net income of $5.7 billion in the first quarter, marking a modest 3% increase from the same period last year and a 13% rise from the previous quarter. This growth occurred despite experiencing drops in both the volume and price of gas sales over the year and the quarter. Their adjusted net earnings, which exclude one-time or unusual items, were $5.1 billion. This represents a significant 22% decline compared to last year and a slight 2% drop from the last quarter. The company's earnings before tax, depreciation, and amortization reached $11.5 billion, while their cash flow from operations significantly decreased to $2.2 billion, falling by 58% from last year and a steep 87% from the previous quarter. TotalEnergies also recorded $644 million in impairments.
New Mexico leads the Rockies region in gas production and ranks as the sixth-largest in terms of active gas wells in the U.S. Last year, the state's gas well count slightly increased by 0.2% to 30,699, with new additions in both the northwestern San Juan Basin and the southeastern Permian Basin. Meanwhile, just to the north in Colorado, gas producers grew by a modest 0.1% to 30,322, primarily due to increased drilling activity in the DJ and Piceance basins. Wyoming saw a decline in its active gas wells by 3.7%, down to 17,006, with production mainly in Sublette, Sweetwater, and Converse counties reflecting stable or slightly reduced drilling activity. Utah also experienced a slight decrease of 0.2% in its number of gas wells, totaling 6,463. In Q1 2024, oil and gas industry activity in Oklahoma, Colorado, and northern New Mexico experienced a decline. This marks the fifth consecutive quarter of contraction in drilling and business activities within these regions. According to a survey that included responses from 33 firms operating in the Rockies, this downtrend is expected to continue over the next six months.
The Williston Basin is a big area filled with layers of rock that sits next to the Rocky Mountains in western North Dakota, eastern Montana, and the southern part of Saskatchewan in Canada. This area covers roughly 110,000 square miles. Geologically, it's very similar to the Alberta Basin in Canada. People started drilling for oil in the Williston Basin back in 1936, and by 1954, most of the land where oil could likely be found was already claimed for drilling. The Bakken Formation with parts of Montana, North Dakota, Saskatchewan, and Manitoba has become one of only ten oil fields globally to yield over 1 million barrels per day (bpd) since the late 2000s. It is currently the third-largest U.S. shale oilfield, behind the Permian and Eagle Ford. The boom in the Bakken started around September 2008, coinciding with the U.S. housing market crash. The application of new technologies, such as swell packers enabling multiple-stage fracturing, significantly enhanced oil recovery, making the Bakken Formation a key player in the U.S. In 2022, the Bakken oil field saw big improvements in how much oil and gas it could produce. At the start of the year, 27 drilling rigs were working there, more than double the 11 rigs from the start of 2021. Important upgrades included making the Tioga Gas Plant able to process 150 million cubic feet more gas each day, and making the Dakota Access Pipeline bigger, increasing its oil transport capacity from 570,000 to 750,000 barrels every day.