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This morning, Concho Resources Inc. announced it will acquire RSP Permian Inc. in a US$9.5 billion all-stock deal. The transaction is the largest US upstream M&A deal since 2012 and the largest purely Permian deal ever.
Concho will acquire 92,000 net acres of top-tier Permian acreage, augmenting its existing 550,000 net acres. Each company's position spans both the Midland and Delaware basins. RSP Permian averaged 55.3 mboe/d of production in the Permian in 2017; Concho's average 2017 annual output was 192.6 mboe/d.
Andy McConn, research analyst at Wood Mackenzie, said: "An expectation to realize new efficiencies was key to Concho's rationale in acquiring RSP. But realizing efficiencies to the extent that Concho estimates (over $2 billion) will be challenging for multiple reasons.
"RSP was already a lean business. Its Delaware position is not contiguous with Concho's. Concho's operational prowess (e.g., high-ranking well performance) could add value to RSP's position. But RSP already operated its position with comparable skill.
"Concho's share-price performance (-8% during morning trading) underscores investors' anxiety about growth-oriented, rather than discipline-oriented, actions by US E&Ps. Headline deal metrics (29% premium to market value; ~US$75,000 per acre) are rich and suggest no pull-back in valuations from previous deals for top-tier Permian assets."
The deal also underscores an argument that is gaining steam in the industry - that performance "sweet spots" aren't as big as originally perceived.
"With more than half a million acres, Concho already held a large Permian position with plenty of drilling inventory," Mr. McConn said. "Buying RSP, which held a smaller but concentrated position in recognized sweet spots, suggests that Concho recognizes the importance of focusing activity in areas of the highest quality."
Concho's acquisition of RSP marks another step in the consolidation of the Permian Basin. Between Q2 2016 and Q1 2017, more than US$40 billion was spent on Permian upstream M&A. However, the targets during this period were mainly assets and privately-held companies rather than public corporations.
"Looking ahead, any other large-scale deals will face significant headwinds, i.e. rich valuations, anxious investors, and scrutiny on operational performance. If this deal is to mark a second wave of 'Permania' in the oil M&A market, potential acquirers will have to be firmly confident in the Permian's long-term potential."