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Shale Deal Could Signal Consolidation in Permian -- WSJ

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03/29/2018 | 06:47 am

By Christopher M. Matthews and Bradley Olson

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (March 29, 2018).

Concho Resources Inc. has agreed to buy RSP Permian Inc.in a deal that could herald the start of a consolidation push in America's most active shale-drilling region.

The companies are valuing the all-stock deal at roughly $9.5 billion, including net debt from RSP, both firms said Wednesday. That would make it the largest-ever deal in the Permian Basin, the area of Texas and New Mexico where big companies including Exxon Mobil Corp. and Chevron Corp. are now ramping up production along with smaller independent shale drillers.

The deal could mean it is "game on in the Permian," investment bank Jefferies Group LLC said in a note to investors, as other producers in the region could move to snatch up smaller competitors. The combination will make Concho the region's biggest current active driller, the companies said.

"We're now getting more into the development phase" of the U.S. shale boom, said Tim Leach, chief executive of Concho Resources. "The efficiency that you can gain by a bigger balance sheet and a bigger program is really what's driving this transaction."

The pace of deals for U.S. shale producers has slowed recently as investors demand the companies exercise discipline and live within their means to provide better returns to shareholders. Larger-scale deals involving assets across the U.S. have been unpalatable to many producers because of shareholder pressure, say bankers and lawyers advising the companies. But deals restricted to assets in the Permian, where logistical scale can provide a huge advantage, could make sense, some say.

As the U.S. shale boom matures and drilling levels continue to intensify in the Permian basin, more operators are trying to boost production while holding down costs. That has become far more complex as companies scramble for workers and supplies needed for the enormous fracking jobs that are far more common now.

Managing the logistical challenge of preparing and disposing of the sand, water, chemicals and other supplies needed for these developments has become a daunting prospect. For example, the sand required for just one well can fill 100 railcars, according to industry analysts.

"If one considers the importance of scale/scope in a currently labor and service constrained Permian basin. this represents a long-term significant strategic advantage," said Simmons & Co. in a note to investors.

Companies also are moving to drill many wells all at once in certain areas to save costs and ensure that the wells don't interfere with one another, a prospect that would reduce their profitability. All those factors point to a need for bigger companies.

Concho is paying a large premium for RSP, purchasing its assets for $76,000 per acre, according to Jefferies' estimates. That price is significantly higher than in other recent deals in the Permian, in which prices were roughly $40,000 per acre or less.

The deal would expand Concho's Permian Basin footprint by about 92,000 acres and would give Concho 27 rigs, the basin's biggest drilling program. Occidental Petroleum Corp. has the highest production from the area, but much of its output is from recovering oil out of older wells.

Given its growth plans, Concho is on track to become the biggest producer in that region within a few years, and all of its operations involve newer, more advanced techniques.

Shares of Concho fell more than 8% Wednesday following the announcement, while RSP shares gained more than 15%.

The deal is expected to close in the third quarter and still requires shareholder and regulatory approval.

--Allison Prang contributed to this article.

Write to Christopher M. Matthews at christopher.matthews@wsj.com and Bradley Olson at Bradley.Olson@wsj.com

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