BHP announced their plans to divest their U.S. shale assets, including a 123,000-acre position in the heart of the Delaware Basin. This acreage position, in terms of a pricing evaluation, could rival the Exxon acquisition of the Bass family’s assets, which totaled over $5.6 billion. We are anticipating a bidding war between supermajors. To break down this gem of an acquisition target, we wanted to analyze comparable transactions in the basin along with key data points to understand the upside of BHP’s Delaware acreage position.
Trying to predict a fair dollar-per-acre price for any acreage in the Delaware is tough, but the two transactions that we wanted to compare were Exxon’s purchase of BOPCO and WPX’s purchase of RKI. Both of these were multibillion-dollar acreage positions offset of BHP in the Delaware, with relatively similar production. RKI was sold in July of 2015, and BOPCO in January of 2017.
It is important to note that the raising dollar-per-acre trend is still occurring in the largest acreage transactions in the basin. It is interesting that BHP, RKI, and BOPCO were all targeting different zones in the Delaware. Operators’ drilling development programs can be very different in this basin, which makes a PUD evaluation difficult. Further, drilling locations can either be considered risked or de-risked based on how an operator is drilling the different benches. These two offset transactions illustrate how difficult it can be to evaluate acreage; therefore, we will need to examine the data deeper.
Comparison of BHP to BOPCO and RKI
Source: BHP, Exxon, and WPX Press Releases and Investor Relations
Delaware Acreage Positions: BHP in Green, RKI in Pink, BOPCO in Purple
Source: XOM, WPX, BHP Investor Relations
The historical price per acreage is going to drive up the cost and raise the upside of BHP’s acreage. By looking at dozens of deals in the Delaware since the start of 2015, it is clear that acreage is getting more expensive. The plot below illustrates the surge in the number of transactions over the past year.
Delaware Basin A&D Activity Since 2015
Source: Detring Energy Advisors, with Drillinginfo
There has been more activity toward the southern end of the basin in the past 12 months. When we look at where the most expensive acreage has sold, it has also been toward the south. Both of these trends favor strongly for BHP, given that it is south of the RKI and BOCPO acreage.
Heat Map of A&D Activity, Colored by $/Acre
Source: Detring Energy Advisors, with Drillinginfo
On top of the increasing price per acre in the Delaware, drilling activity has also followed suit. Reeves, which holds the majority of BHP’s acreage, has over 70 rigs running in the county and has the most active rigs in any county in the L48. Reeves is also home to some of the most expensive transactions. This raises a few questions for production and geological data. Are the reservoirs better in the southern end of the basin? Are there more benches of production toward the south?
Reeves Historical Rig Count since May 2015
Source: DI Rig Analytics
As the amount of proved up zones increases, acreage pricing will increase. The de-risking of potential zones for PUD by the development and “proving out” of the various benches in the Delaware has been going on for the past few years. Operators have different opinions of zone delineation and even different naming conventions for the different zones. We saw that Carrizo had a great slide from their last earning call, which sums up the ongoing development, seen below. Most operators have only drilled half of their potential zones, as they are looking to master completing a certain geology before experimenting with a new zone. With anywhere from five to 10 zones, delineation of the Delaware will continue for years, thus driving up prices.
Summary of Delaware Operators’ Zone Development, June 2017
Bone Springs has been more commonly drilled in the Northern Delaware, and Wolfcamp has been more popular in the Southern Delaware. The thickness and potential of each zone varies greatly across the basin, and BHP is in an interesting location in terms of de-risked geology. BHP is located in an area between Bone Springs and Wolfcamp developments and has vastly targeted Wolfcamp A and B, with very little Bone Springs development. Offset of BHP to the northwest, the Second Bone Spring has been produced. The First Bone Spring and the Avalon Bone Spring have been produced to the northeast of BHP. Wolfcamp A and B have been drilled and produced offset all around them.
BHP’s Acreage and Offset Zone Horizons
Source: Drillinginfo, Detring Advisors
BHP has two de-risked zones in Wolfcamp A and B, and at least three more risked benches in Bone Springs. This illustrates the zone delineation problem for evaluation. In order to create a price per acre for each bench, the next step in analysis is to break down the five benches of interest by using area type curves. We did this by borrowing the economic analysis of over 15 area type curves from the Detring Report, and the single-well economics offset of BHP look very strong.
Discounted ROI Heat Map Offset of BHP
Source: The Detring Report
The PUD type curves were generated by normalizing production to a modern completion design, in this case to a 15 MMlb frac job. The EUR is a three-stream calculation. Wolfcamp A and B appear to be the best zones for production near BHP, and BHP has de-risked the Wolfcamp A and B. It is very important to note that each zone is economic with current conditions. These assets can be up to over $20k per acre, per bench, with these five benches being totaled to over $100k per acre.
Detring Report Economics, Type Curves by Zone
In theory, the PUD should be priced out for each bench and the number of drillable locations in that zone. We believe that the market is transitioning over to this sort of zone-by-zone economic breakdown. However, that is tough due to zone delineation, well spacing, and increasing frac intensity/optimization. There has not been a golden standard set to any of these key data points, but as all three of these data points improve, so will PUD pricing. It is unreasonable for the BHP transaction to sell for over $100k per acre, but a starting point of $25k per acre seems possible.
The average transaction for 2017 has been over $30k per acre in the Delaware, the acreage offset of BHP has production from over five zones, and each zone is economic. Therefore, we are expecting to see a transaction from $4.5 billion at $25/acre to over $6.3 billion at $40/acre. The upside of the further zone delineation and increasing drillable locations could set the BHP divestiture to a new benchmark in the basin.