Occidental Petroleum (OXY -0.15%) could be nearing a deal to buy privately held oil producer CrownRock. The Wall Street Journal reported that the oil giant was in the lead to buy the Permian Basin producer. The deal could be worth more than $10 billion.
The potential deal would be the latest in a wave of merger activity in the oil patch. ExxonMobil (XOM -2.78%) and Chevron (CVX 0.37%) closed multibillion-dollar acquisitions this year and have since agreed to even larger transactions. That's spurring rivals to consider deals of their own to keep up with those energy giants.
In the lead to buy a prized producer
Occidental is one of several oil companies linked to CrownRock in recent weeks. Reuters reported last month that ConocoPhillips was weighing an offer for CrownRock. Meanwhile, Devon Energy, Diamondback Energy, Marathon Oil, and Continental Resources have all looked into buying CrownRock. Given the intense interest, talks with Occidental might not lead to a deal if one of those rivals, or another suitor, swoops in at the last moment.
The big draw with CrownRock is its sizable position in the Permian Basin. The company owns more than 80,000 acres in the northern part of the Midland Basin. It currently produces about 150,000 barrels of oil equivalent per day (BOE/d) from that position. Buying CrownRock would enable the acquirer to meaningfully increase their scale in the resource-rich Permian. That would allow them to spread costs over a larger position, increasing their profit margin.
Occidental is already one of the largest players in the Permian. The company holds 2.8 million acres. Overall, it produces 588,000 BOE/d from its position in the Permian. Acquiring CrownRock would enable Occidental to further increase its scale in the region and leverage its existing position to reduce costs.
Getting bigger and better
Scale has been the main driver of the current wave of mergers in the oil patch. Exxon is paying over $60 billion to acquire Pioneer Natural Resources to boost its scale in the Permian. The deal will more than double Exxon's acreage position in the region (adding 850,000 net acres to its existing 570,000 net-acre position). It will also more than double its Permian production to a combined 1.3 million BOE/d. Exxon believes its enhanced scale will enable it to earn double-digit returns as it recovers more resources more efficiently.
Scale also drove Chevron's $7.6 billion deal for PDC Energy. It significantly enhanced Chevron's position in the DJ Basin where it added 275,000 net acres. Meanwhile, it added 25,000 acres to its position in the Permian. That increased scale drives Chevron's expectation it will capture about $100 million in cost savings while adding about $1 billion in annual free cash flow. Meanwhile, the company's $60 billion deal for Hess should enable it to capture around $1 billion in cost savings.
An acquisition of CrownRock could enable its acquirer to achieve meaningful cost savings by streamlining development plans, leveraging existing infrastructure, and spreading costs over a larger position. That's why so many oil companies are interested in CrownRock.
Only one oil company will emerge victorious in the bidding for CrownRock. That will likely lead its other suitors to look elsewhere for a needle-moving deal. Some could seek to join forces -- Devon and Marathon have reportedly held merger talks -- while others will likely look at another private producer, potentially circling back to see if Endeavor Energy Resources is now ready to sell.
The next wave is about to hit
Occidental Petroleum is reportedly in the lead to acquire CrownRock. A potential tie-up between the two would enhance Occidental's already strong position in the Permian, further increasing its scale. The conclusion of that auction process would likely lead other suitors to look elsewhere for a deal so that they don't lose out on the opportunity to participate in what's becoming a major consolidation wave in the sector.
