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.

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:

Permian-Only, Permian & DJ E&Ps

Key Takeaways: Permian-Only, Permian & DJ E&Ps

Diversified, Bakken & Eagle Ford E&Ps

Key Takeaways: Diversified, Bakken & Eagle Ford E&Ps

Gas (Appalachia & Haynesville) E&Ps

Key Takeaways: Appalachia & Haynesville E&Ps

Assessing E&P Reserves Against EIA’s Lower 48 Shale Reserve Estimates

Returning to our basin-level reserve life calculations, the aggregated E&P reserve life metrics align closely with the Lower 48 narrative, taking into account the 2023 reserve adjustments for each E&P. The Bakken, Eagle Ford, and gas-weighted E&Ps show particular consistency with the basin-level reserve calculations, indicating that the E&Ps in these basins provide a reliable pulse check for near-term production activity. Similarly, Permian E&Ps align with the basin-level metrics, with recent production suggesting a more measured pace of development.

I anticipate continued acquisition activity in the Permian, as the drive for inventory security through consolidation shapes the overall theme for 2024. This trend reflects a strategic move towards securing long-term production stability and underscores the importance of reserve inventory amidst an ever-changing oil and gas market landscape.

I appreciate that there is a lot of information here and should you have any questions regarding my reserve calculations feel free to reach out to me via email at [email protected] or by phone at (403) 991-8587.

Companies Mentioned

_{Disclaimer: All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Patrick Enwright accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication. All information is provided without warranty, and Patrick Enwright makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained.}