Utah Shale Next Spot for Consolidation

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Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--SM Energy (NYSE:SM) (Denver, Colorado) will spend $2 billion to buy Utah shale assets from XCL Resources (Houston, Texas), while Northern Oil and Gas Incorporated (NYSE:NOG) (Minnetonka, Minnesota) will buy 20% of its assets for $510 million, for a combined $2.5 billion deal.

SM Energy said it will serve as the operator of any assets currently run by XCL, adding it would use a combination of debt and cash on hand to finance the transaction.

"We believe that this transaction checks the boxes for our acquisition criteria, and we expect to demonstrate value creation through performance optimization, inventory expansion and growth in adjusted free cash flow," said Herb Vogel, SM Energy's president and chief executive officer. His company believes the Uinta basin in Utah has high oil content and the new acreage could increase the amount of oil produced from its assets to 52% of the total mix. It estimates its net production would reach around 195,000 barrels of oil equivalent per day (Boe/d) by 2025.

NOG, for its part, said the assets acquired from XCL were averaging around 10,500 Boe/d, with 85% of that as oil.

Break-evens in the Utah shale patch are as low as $43 per barrel, about half the price of Brent, the global benchmark for the price of oil.

"The Uinta Basin has emerged as one of the best and fastest growing oil resources in the United States, and SM has a track record as one of our best and most responsible operators," said NOG Chief Executive Officer Nick O'Grady.

Utah accounts for a small fraction of total U.S. natural gas production, hosting only three of the 100 largest fields in the country. The state produces about 1% of the nation's total oil, but accounts for 16% of what's produced in the Rocky Mountain region.

Utah also hosts the largest deposits of oil sands in the country, but extraction has so far proved to be uneconomical, the U.S. Energy Information Administration found.

NOG added that the assets acquired in the deal, assuming the transaction goes through, are normalized for 10,000-foot laterals, extensions that are improving well efficiency across the U.S. shale patch.

Total U.S. shale oil production should average 9.8 million barrels per day for all of June, about 5% higher than year-ago levels.

The grab on XCL's portfolio comes amid something of an era of consolidation among energy companies. From Chevron Corporation (NYSE:CVX) (San Ramon, California) to Exxon Mobil Corporation (NYSE:XOM) (Spring, Texas), the majors have been moving in on its competitors. ConocoPhillips (NYSE:COP) (Houston, Texas) was the latest to announce a mega buy, saying it would acquire rival Marathon Oil Corporation (NYSE:MRO) (Houston) for an all-stock transaction that was 10 times as high as what was put on the table for XCL's assets in Utah.

Deals on XCL's assets are expected to close no later than fourth-quarter 2024.

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