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M&A Exerts a Gravity on Permian Rig Counts

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Like a force of gravity, upstream dealmaking is steadily pulling rig counts lower in the Permian Basin. Drilling activity is well below recent highs despite supportive oil prices near $80/bbl. A review by East Daley finds mergers among Permian operators to be the main culprit. 

Since hitting a recent high of 353 in April 2023, rig counts in the Permian Basin have dropped to 294 for the latest week ending May 5, a decline of 59 rigs (-16.7%) over 13 months, according to data in EDA’s Energy Data Studio.

Permian rig mna

While softer commodity prices could account for some of the reduction, mergers and acquisitions (M&A) appear to be the main driver. East Daley’s updated review finds that companies involved in Permian M&A, either as acquirers or acquisition targets, have shed 38 rigs since the start of 2023, accounting for ~65% of the overall decline in the basin (see figure above).

Permian M&A activity has dominated the news cycle since 2023, reaching a peak with ExxonMobil’s (XOM) $60B acquisition of Pioneer Natural Resources (PXD) in October ‘23. Yet the giant XOM-PXD deal was an exception, as most mergers have involved buyouts of private operators by their public counterparts. These deals include Civitas Resources’ (CIVI) purchases of Hibernia Resources and Tap Rock Resources, Diamondback Energy‘s (FANG) acquisitions of Lario Oil & Gas and FireBird Energy, and Occidental’s $12B acquisition of CrownRock.

One collateral effect has been that, once deals close, acquiring companies have allowed rigs to roll off from the acquired companies. Since most of the acreage acquired in the Permian is held by production, operators don’t see a need to keep legacy rigs running. Executives are also under pressure to show returns from consolidation, and dropping rigs is one way to cut expenses.

EDA’s updated review through April ‘24 finds that for deals that have already closed, acquiring companies have dropped all the legacy rigs of the acquired operators, while rig counts for the acquirers have mostly held steady. The trend indicates that acquiring operators are more focused on backfilling their drilling inventory than ramping production.

Additionally, several large deals in the Permian have yet to close this year, including XOM-PXD, OXY-CrownRock and Diamondback-Endeavor. Currently the total rig count among those to-acquired companies sits at 37. XOM indicated it does not intend to make strong cuts to Pioneer’s legacy rigs; excluding PXD's activity leaves 16 rigs from the remaining operators that could be on the chopping block once those deals close. – James Taylor Tickers: CIVI, FANG, OXY, PXD, XOM.



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