At first, there seems to be a curious disconnect between the plunging price of crude and the stock of PDC Energy (PDCE) , a midsized producer of oil and gas with a stock that hit its 52-week high today and is up about 8%.
But there shouldn't be because even though inventories are ballooning, as we saw with the 10:30 a.m. ET report from the Energy Information Agency, PDC Energy is the latest company to plunk down a huge amount of money to diversify heavily into premium Delaware Basin oil from Texas. For $1.5 billion, PDC picks up 57,000 acres of fantastic land that makes this Colorado-based producer much less dependent on more expensive areas to produce oil.
The cash consideration for the land is $915 million. Another 9.4 million shares are thrown in to the seller, a private outfit, Kimmeridge Energy. That's right, even though there will no doubt be a secondary offering by Kimmeridge, stock buyers just don't care. They know that when you buy in the basin you could be getting land with drilling costs as low as $2 and change, which is what Scott Sheffield, the dean of the Permian, told us his cost is for the best portions of the area, which include the Delaware sub-basin.
Sheffield knows his stuff. Pioneer (PXD) , which was added to the focus list by Credit Suisse this morning, bought a ton of acreage in June from Devon (DVN) in the Permian and issued 5.75 million shares to pay for it. You are up nicely if you bought on that offering as there have been multiple upgrades since then, of which Credit Suisse's is the latest.
SM Energy (SM) -- the old St. Mary's -- recently bought acreage in the same area from Rock Oil, issuing 16 million shares in a wildly oversubscribed offering that has given you a 20% gain. Concho (CXO) shelled out $1.6 billion to buy acreage from the private Reliance. Its subsequent stock deal, priced at $130 and change per share on Aug. 16, has also made you a couple of bucks, and roughly $5 if you jettisoned it two days after the pricing.
That's right, PDC Energy is simply following in the footsteps of Pioneer, SM and Concho, all of which have high-graded their properties, slashing their break-evens dramatically, thereby becoming much more investable in one fell Permian swoop.
So while oil plunges, PDC enjoys its day in the sun. That's why you have to believe CEO Bart Brookman when he said on his call today that it is indeed a "transformative" acquisition that is "game-changing" for this company.
Now, you have to ask, what are the majors thinking?