Civitas Enters Permian Basin With A Pair Of Acquisitions

Prior to Tuesday, Civitas Resources
CIVI
billed itself on its website as “Colorado’s largest pure play oil and gas producer,” with assets focused in the state’s Denver-Julesberg Basin. As of Wednesday, that description will need changing, after the company entered into two purchase agreements totaling $4.7 billion as an entry point into both the Midland and Delaware sub-basins of the greater Permian Basin. Once the transactions are completed, Civitas will need to add New Mexico and Texas to the list of states in which it has operations.

Civitas announced Tuesday that it will acquire both Hibernia Energy III and Tap Rock Resources from private equity sponsor NGP for $2.25 billion and $2.45 billion, respectively. The transactions are expected to close during Q3, 2023, with an effective date of July 1, according to Civitas’s release. The deals will add combined proved reserves of approximately 335 MMBoe, as of year-end 2022, and 68,000 net acres, roughly 90% of which is currently held by production to Civitas’s holdings. The combined acquisitions were almost equal to Civitas’s current market cap of roughly $5 billion.

In an email, Andrew Dittmar, director at Enverus Intelligence Research, pointed to limited expansion opportunities in the DJ Basin for Civitas, and compared the deals to Chevron’s
CVX
recent purchase of PDC Energy. “This looks mostly like a play for additional scale for Civitas and expands the company’s operations beyond the DJ Basin into both sub-basins of the Permian,” Dittmar notes. “While Civitas’ remaining DJ drilling locations are economic at current prices, future expansion opportunities in the play look limited with few remaining private companies to roll up. That was likely a key factor in why Civitas peer PDC Energy decided to sell the Chevron and why Civitas is jumping into the Permian Basin.”

Due largely to superior economics and a more-welcoming policy environment, the Permian region has been a prime target for merger and acquisitions in the oil and gas upstream in recent years, but Dittmar points out that those and other advantages mean a comparatively high cost of obtaining acreage and existing production there. “Civitas appears to have paid around $7,000 per acre for the Delaware assets of Tap Rock and nearly $17,000 per acre for the Midland assets operated by Hibernia. That compares to prior deals in its home base in the DJ Basin that have priced at production value alone, a trend also seen in plays like the Eagle Ford.”

Dittmar also notes these sales by NGP continue a trend of private equity firms unloading assets in the Permian while demand for them is high and strong prices can be commanded. Fellow private equity firm EnCap has monetized over $8 billion in the play recently, with NGP now following suit. “With a few exceptions, private equity firms are more likely to be looking outside the Permian Basin for new investment opportunities as they have been priced out of acquiring assets there,” Dittmar says. “For the public companies active in the basin, the next wave of M&A could come from corporate consolidation as remaining private acquisition opportunities are scarce.”

The Bottom Line

The Civitas acquisitions combine with Chevron’s buyout of PDC in late May to help bring what had been a slow 2^nd quarter where M&A activity was concerned to a strong close. The ongoing pursuit by acquiring upstream companies for headcount efficiencies and economies of scale most likely mean that the “bigger is better” trend towards more consolidation in the shale business will continue for the foreseeable future.

With its superior economics and more welcoming policy environment, we can expect the Permian region to remain the main area of focus for future dealmaking.