Assessing Reserves, M&A & Potential Impact on Account Plans

Assessing Reserves, M&A & Potential Impact on Account Plans

With rumors that private equity-funded Double Eagle Energy Holdings IV, LLC (private) could be selling off its Permian assets in the near future, I felt it would be beneficial to assess the current US landscape by analyzing reserve life by the prominent E&Ps as outlined in my Companies Mentioned list at the end of this note. Before delving into the calculations and metrics, let’s first have a quick review of recent M&A transactions.

• ConocoPhillips’ (COP) acquisition of Marathon Oil (MRO) (May 29, link)

• Crescent Energy’s (CRGY) acquisition of SilverBow Resources (SBOW) (May 16 link)

• ExxonMobil (XOM) completes acquisition of Pioneer Natural Resources (May 3 link)

• Chord Energy’s (CHRD) acquisition of Enerplus Corporation (ERF) (February 21 link)

• Merger of Diamondback Energy (FANG) and Endeavor Energy Resources (Private) (February 12 link)

• Merger of Chesapeake Energy (CHK) and Southwestern Energy (SWN) (January 11 link)

• APA Corporation’s (APA) acquisition of Callon Petroleum (CPE) (January 4 link)

Benchmarking US Onshore Proved Reserves

To gain a clearer understanding of current reserve levels among publicly traded E&Ps, I analyzed the year-end 2022 proved reserves data from the Energy Information Administration (EIA). By comparing these reserves against the FY23 basin-level production data, also from the EIA, I calculated the reserve life index, expressed in years.

It is commonly understood that the Bakken and Eagle Ford basins are the most mature among the major basins in the Lower 48. However, without supporting reserve metrics, such assessments lack concrete validation. My calculations reveal that the Bakken and Eagle Ford have the lowest reserve life indices among the seven basins, with undeveloped reserves at or below four years. While the Bakken is experiencing year-over-year production growth at the basin level, the Eagle Ford, along with the Haynesville and Anadarko basins, have seen YoY monthly declines. Given the limited reserves in these two basins, it is reasonable to expect that the basin-level production growth will likely remain static or potentially decline.

The Permian Basin's total proved reserve life of 12.6 years and undeveloped reserve life of under five years underscore a challenging reality: the basin is unlikely to return to the ~2% monthly sequential growth it enjoyed from 2017 to early 2020. A more realistic forecast predicts sub-1% sequential growth and mid-single-digit YoY growth at the basin level. This aligns with the ongoing consolidation trend in the Permian, driven by the need for security and certainty in inventory. For many E&P companies, Tier 1 acreage is in short supply. The shift to developing Tier 2 inventory has led to either inconsistent production results or a significant drop in well productivity. In simple terms, it’s hard to justify a high-grading strategy when there’s no more "high grade" inventory available. The current reality for E&Ps operating in the Permian, Bakken, and Eagle Ford is that success depends on having the largest and best-quality remaining inventory. This has fueled a steady stream of mergers and acquisitions over the past year, with in-basin acreage alignment being a critical catalyst for these deals.

In their continuous quest to "generate shareholder value," E&P executive teams are likely aiming to strengthen their core assets through scale. This “acquire or be acquired” strategy is designed to position the company as one of the few powerhouse E&Ps out of the flurry of M&A activity that is capable of commanding a dominant market position in their respective basins amid the ongoing M&A activity.

Why This Matters to Business Development/Account Managers

As I delve into the E&P reserves analysis, my advice to Account Managers in the oilfield services and supply sectors is to prepare for further consolidation and to recognize the growing divide between larger E&Ps and junior producers. Similar to the Pareto Principle, approximately 50% of U.S. onshore production is operated by the Companies Mentioned at the end of this note. With an aggregated Lower 48 proved reserve life of ~13 years remaining, it is clear that business development initiatives should focus on securing multi-year service agreements with these top 25 E&Ps. At the same time, it's crucial to remain active in targeting multiple junior producers to meet sales targets.

In addition to this focus, consider the following strategic elements:

1. Leverage Data Analytics: Utilize advanced data analytics to identify emerging trends and opportunities within both the top 25 E&Ps and junior producers. Tailor service offerings based on predictive insights to stay ahead of the competition.

2. Diversify Service Offerings: Expand and diversify service offerings to cater to the specific needs of both large and small E&Ps. This can include innovative technological solutions, customized support services, and flexible pricing models to accommodate different budgets and operational scales.

3. Strengthen Relationships: Foster strong relationships with key decision-makers in both large and junior E&Ps. Regularly engage with clients through workshops, seminars, and industry events to better understand their evolving needs and position your company as a trusted partner.

4. Collaborative Partnerships: Explore collaborative partnerships and alliances with other service providers to enhance your value proposition. Joint ventures can provide a more comprehensive suite of services, making your company a more attractive option for E&Ps looking for integrated solutions.

5. Agility and Adaptability: Develop a flexible and agile sales strategy that can quickly adapt to market changes such as the M&A activity we have seen YTD. This includes being prepared to scale operations up or down based on demand and being responsive to shifts in the regulatory landscape.

Permian-Only, Permian & DJ E&Ps