What Permeates 3 Big Oil Deals? Permian

 | Jan 19, 2017 | 12:13 PM EST
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If there was ever a week to highlight the opportunity in U.S. shale oil, last week might have been the biggest. With three major deals from Exxon Mobil (XOM) , Noble Energy (NBL) and Anadarko (APC) , we have the continuing theme of majors and mini-majors focusing their production throughout this down cycle in oil prices and preparing for the longer-term rally. And with all three of these deals, one play comes to the forefront: the Permian. 

First, Exxon's major move of buying up the privately owned Bass family acreage for $6.6 billion. This buy completes the Rex Tillerson era for Exxon as he moves on to the secretary of state role for President-elect Donald Trump. And while Exxon has been slowly acquiring Permian acreage in West Texas for the past few years, this deal represents an enormous potential for the largest U.S. oil company in the hottest U.S. shale play, with an estimated 60 billion barrels of oil in reserves from the 275,000 acres. 

Next, we saw Noble Energy acquire the Permian assets from Clayton Williams (CWEI) , which has been by far the hottest Permian play stock in the last year. After trading in single digits in the spring of 2016, CWEI has steadily risen throughout the year to above $100 a share -- only to rocket well past that number with the premium Noble paid -- to nearly $150 a share. It goes without saying that the folks at Noble are even more convinced of the potential of Clayton Permian acreage than even the market has been in the last fantastic year. 

Finally, we saw the sale of Anadarko Eagle Ford acreage for $2.3 billion to Sanchez Energy (SN) . This deal is particularly interesting when we look at the additional sale of Marcellus natural gas acreage that Anadarko also recently made to Alta Resources for $1.2 billion. 

Two questions arise: What does the Anadarko sale have to do with the Permian, and what do these three deals mean for us? 

In context, the Anadarko deal is decidedly about the Permian -- acreage it already holds. It's become clear Anadarko is committed to focusing its production efforts in only two places; the Gulf of Mexico and the Permian -- it added Gulf assets from Freeport-McMoRan (FCX) in September for $2 billion. In this new age of lowered capital spending and limited drilling resources, the move away from the Marcellus and Eagle Ford is truly all about maximizing Anadarko's opportunity in the Permian. 

Noble also is looking for a foothold in this hottest of shale plays, and Exxon has been looking for a big buy in the shale space since the deleveraging in smaller shale producers began in early 2015. It's surprising to me it waited this long, but not surprising that it chose also to spend big in the Permian. 

We could argue, or at least I could, that the enthusiasm for this one lone play is way overwrought. Exxon claims the Bass acreage has 60 billion barrels of reserves, yet only 3.4 billion barrels are currently recoverable. Noble paid a huge premium for Clayton Williams, despite the stock already notching a 10-bagger over the last year in price. And Anadarko sold Eagle Ford acreage at an average of $7.67 per barrel of oil equivalent in reserves, well below contemporary deals that valued acreage above $12 per barrel. 

None of this should matter to us. 

The money is flowing from the biggest players into the Permian. And while there's undoubtedly money to be made in other plays, you just don't want to be left out where the action is going to be the hottest for at least the next two years. 

All that is to say you've got to find quality Permian players for putting in a nice chunk of your energy portfolio. I have already given you two of the best -- Cimarex Energy (XEC) and Centennial Resources (CDEV) , which we got after the Mark Papa's Silver Run bought in. 

Oil is taking a break from its run, but I think it's only temporary. These three deals give you a place to look on where to take advantage of that break. Take it now. Get some Permian oil stocks in your bag.

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