Little spillover (yet) from Concho acquisition of Permian producer RSPP

Today Concho Resources (CXO) announced the acquisition of RSP Permian (RSPP) to create the biggest  oil and natural gas producer from the shales of the Permian Basin. The $9.5 billion all stock deal represents a 29% premium to the Tuesday close for RSP Permian. That company’s shares climbed 15.62% today. Shares of Concho Resources dropped 8.76%.

The shares of other big Permian producers didn’t move up on the deal but instead fell with the price of oil. West Texas Intermediate fell 0.9% today on a report from the Energy Information Administration that U.S. crude inventories increased by 1.64 million barrels last week. Industry analysts surveyed by Bloomberg had expected an inventory build of only about half that level. Shares of Pioneer Natural Resources (PXD), for example, closed off 2.37%. Diamondback Energy (FANG) was down 3.49%.

The relative lack of action in the prices of bigger Permian producers also makes sense since these companies would likely be acquirers rather than acquisition targets like RSP Permian. The shares of companies with attractive concentrations of Permian acreage and a size that would make them potential targets did move up today even with the decline in oil prices. Parsley Energy (PE), for example, gained 1.48%.
 
The deal certainly came at a substantial premium to other Permian acquisitions. Analysts at Sanford C. Bernstein estimate that the price works out to about $75,000 per acre for RSP Permian’s land. That’s well above the already elevated levels of $30,000 to $50,000 per acre paid in recent Permian deals.
 
The key to the deal for Concho is the reduction in production costs that comes from consolidating its acreage with that of RSP Permian. With more continuous drilling acreage, the company will be able to reduce downtime when it moves a rig as well as being able to access more oil from a single drilling platform. After the deal Concho Resources will control 640,000 leased acres in the Permian Basin and will operate a drilling program employing 27 rigs. Analysts estimate that cost savings will reduce Concho’s production costs to $16 a barrel in the Permian Basin.
 
Diamondback Energy is a member of my Jubak Picks Portfolio. I own Pioneer Natural Resources in my long-term 50 Stocks Portfolio. I own call options on Pioneer Natural Resources in my Volatility Portfolio on my subscription sites JugglingWithKnives.com and JubakAM.com.