The average price for US onshore shale acreage has declined by more than 70% in two years, a Rystad Energy analysis shows, plunging to $5,000 per acre in 2020 from $17,000 per acre in 2018. This massive drop is a result of the West Texas Intermediate (WTI) oil price losing significant value and is providing a financial push for consolidation in the shale industry in 2021 and 2022. Fundamentally, tight oil and gas economics have improved significantly since 2018, yet the implied price strip in our new base case is substantially lower than it was in 2018, which cuts off a large portion of the industry's undeveloped NPV potential. The Permian Delaware, at $30,000 per acre, and the Midland, at $17,000 per acre, are still leading in terms of acreage prices. Naturally, the multi-stacked potential of the play allows for simultaneous development of several zones from the same spacing unit, which in turn multiplies the surface acreage's NPV potential. When it comes to the fundamental upstream asset value of specific leading public operators, we see a per acre drop of close to $20,000 from the 2018 levels, which represents a 44% reduction in the two years, from $45,000 per acre to $25,000 per acre in 2020. Not surprisingly, operators with more diversified portfolios have a slightly lower NPV/acre compared to the pure Permian-focused producers. For example, the average price for EOG Resources is estimated at around $16,000/acre, while its Permian Delaware asset alone is valued at $50,000 per acre at Rystad Energy's current base case price strip. The second factor that impacts acreage prices quite significantly is the proportion of surface acreage to the focused development acreage selected by an operator, a fundamental factor driving the NPV. In most cases, large acreage positions would have lower NPV/acre amid a higher share of less prospective Tier 3-4 units. The Permian Basin has seen a more significant reduction in valuations than other basins, based on historical deal price comparisons. The most recent Permian-focused transactions attracted little to no acquisition premiums, with an average price of about $24,000 per acre. This corresponds to a staggering 67% decline from the earlier deals in 2018, headlined by the sale of RSP Permian and BHP's Permian portfolio for more than $70,000 per acre. "The reduction in valuations is promoting consolidation that wouldn't have happened in 2018-2019. Low equity prices and the need for investor support is motivating many operators to look for new options to merge, especially if it doesn't involve heavy debt and cash. "In turn, asset spin-offs and the sale of non-core acreage in liquids basins are comparatively lower now, and we do not foresee demand for such assets rising in the coming quarters," says Alisa Lukash, senior analyst at Rystad Energy. Such spin-offs and cash transactions could return when WTI recovers above the $45 per barrel mark as most operators tightly hold on to their Tier 1 inventory, Lukash adds. Consolidation Mergers and acquisitions (M&A) in the onshore industry reached a record high in the second half of this year, recovering sharply from the dramatic slowdown in the second quarter as the rapid spread of COVID-19 created a period of massive uncertainty, pushing both potential buyers and sellers to the sidelines. So far this year, we have seen both mergers of equals as well as large acquisitions by major producers. That's in contrast to 2019 when most of the transactions were small premium deals between play-focused operators. By acquiring a neighboring player, operators were typically able to increase their existing acreage position, realizing operational synergies and growing output at a reduced cost. The recovery in M&A in the second half of this year is helping extend the trend of consolidation that began in 2018, which was briefly disrupted earlier this year. Further consolidation and an increased degree of standardization, along with continued reductions in service costs, would likely result in an additional fall of up to 5% in industry-wide average D&C costs next year. Moreover, even more capital is likely to be allocated to Tier 1 acreage in the Permian in future, ultimately pushing the P50 breakeven price in the basin down toward $20 per barrel. The ongoing onshore consolidation will surely result in a deceleration in the country's rate of production growth in future. The industry is moving away from the historical reinvestment rate of 75-90% toward a more conservative target of 70-80% because of a lack of investor support for aggressive growth models. This will take the growth rate of future oil production, over 2021-2025, from 7-8% per year under the old model, to 3-5% per year in a $40 per barrel WTI environment. Rystad Energy believed that the gradual recovery in US tight oil production in a $40 environment should be viewed as the base case. The industry will be able to achieve it while delivering on its deleveraging target and generating material FCF yields from 2021. Under the new industry model, we expect US tight oil production to recover to the pre-COVID records by 2023, with nearly all growth coming from the Permian Basin. The Permian is the only major region which, in our view, will be able to surpass its pre-COVID production record and hit 6 million bpd by 2025. The impact of the recent mergers on the global crude supply, demand balance might have a dual influence — it might stimulate additional capital support, which in turn could lead to a steady rise in US volumes if WTI returns to $50 per barrel. On the positive side, the smaller the peer group of large producers driving the increases in crude volumes, the easier it will be to ‘control' and forecast US supply. — Rystad Energy
