The price to access unexplored shale assets on the New Mexico side of the Permian Basin soared to US$95,001 an acre in a federal government auction, a record high for North America’s biggest oil field.
The state’s previous record was US$40,001 an acre set in December, according to a statement by the U.S. Department of the Interior Thursday. Overall, the two-day auction saw bids on 142 parcels of land and raised US$972 million, more than the whole of 2017 and double the 2008 record.
Federal Abstract Co., a firm in Santa Fe that bids on behalf of anonymous investors, was listed as the record bidder, according to the U.S. Bureau of Land Management. The company, which paid US$387.4 million in total for rights to 17 pieces of land, didn’t immediately respond to a phone call seeking comment.
EOG Resources Inc., Devon Energy Corp., Exxon Mobil Corp. (XOM.N) and Chevron Corp. (CVX.N) would be “logical buyers” of the tracts because they own nearby drilling rights, Scott Hanold, an Austin-based analyst at RBC Capital Markets LLC, wrote in a note Friday. Contiguous leases are essential for drilling long, horizontal wells.
The auction provides a rare peek into how oil producers value drilling rights in the Permian, most of which is in Texas, where land and minerals are privately owned. Record prices show that despite a recent slowdown in activity due to pipeline shortages, explorers view the Permian’s stacked layers of oil-soaked rock as a unique long-term asset.
“We were expecting high bids, I can’t say I was expecting US$95,000” an acre, said R.T. Dukes, Lower 48 upstream research director at Wood Mackenzie Ltd. “The Permian is the center of the oil universe when it comes to investment right now and just because of a few pipeline constraints that’s not going to change.”
The New Mexico auction’s high price is “tremendous positive read-through” for Permian oil stocks, which have an average valuation of about US$32,000 an acre, according to analysts at Seaport Global Securities LLC.
The leases are for a 10-year term and a royalty of 12.5 per cent, according to the Bureau of Land Management. That gives operators better terms than Texas properties on the other side of the border, where leases typically last up to five years with about 25 per cent royalties.
The US$95,001 price tag for the drilling rights is about 16 per cent higher than what Concho paid earlier this year for RSP Permian Inc. On the day that deal was announced, the amount generated heartburn for Concho investors, who sent the stock tumbling 10 per cent.
The auction was competitive, with multiple rival bidders pushing up the price of the New Mexico acreage, Dukes said.
“This could be a company that has another thousand or two acres around it that they really can’t drill without having this acreage,” he said.