Rystad Energy: Shale Newsletter - June 2019 - eng

The consolidation process in the Permian Basin is underway, echoing the evolution of many mature basins that came before it. Taking a closer look at these historical examples can provide clues that hint at the possible implications a number of active operators in the Permian may face as the basin continues to consolidate.

Figure 1 shows the number of active operators in the Midland and Delaware basins, along with the Bakken, Eagle Ford, Marcellus and Utica plays. Within this analysis, Rystad Energy considers an operator as active if it has completed at least one horizontal unconventional (fracked) well in the given year. The tallies are based on Rystad Energy’s standard company names, which account for both historical M&A activity and different legal entities of the same company.

From 2009 to 2014 both the Bakken and Eagle Ford went through periods of increased interest in the exploration of unconventional resources. The number of operators grew substantially, peaking at 75 players in Eagle Ford in 2014 and 52 companies in Bakken in 2012. These numbers dropped sharply from 2015 to 2016, sliding by between 30% and 50% during this period of low oil prices – a trend driven both by the process of consolidation and by paused activity at these mature basins. Some operators resumed development in Bakken and Eagle Ford during 2017 and 2018, resulting in the number of active players increasing again. Yet, the number of operators active in these basins has not fully recovered to the levels seen in 2012 to 2014, suggesting that the consolidation process carved out 15% to 35% of unique company names.

Marcellus reached its peak in terms of the number of active operators in 2011, earlier than its peers. Since that time it has seen a reduction of around 40% in the number of active companies. Utica Shale attracted as many as 26 different E&Ps at peak in 2014, but recent M&A activity took the active operator count down to 19 or 20 names.

In turn, the Permian Basin is showing the first signs of an inflection point in terms of the number of active players. The active operator count declined marginally last year on the Midland side of the basin, but Delaware still saw an increase of about 20%, with many new private company names appearing in the operator list. We expect that it will take more time to see material reductions in the number of active operators in the Permian, as total resource potential in the basin is likely much larger than in other basins. The primary reason for this is because any reductions in the operator count that occur through M&A activity can often be easily offset by continuous injections of small E&Ps backed by private equity.

Looking at the share of the top 10 operators in terms of basin-wide horizontal completion activity last year helps to understand where the Permian currently stands within its consolidation curve. In Delaware, the top 10 operators account for just half of the total completions in the basin, illustrating the significant contribution from smaller operators. Midland is a bit more similar to mature basins, with 61% of completions driven by the top 10 operators. In Appalachia, meanwhile, the top 10 operators contribute the most in terms of basin-wide horizontal completion activity, as the largest operators in both Marcellus and Utica account for around 80% of activity.

The magnitude of the consolidation process in some mature basins looks even more dramatic when accounting for historical, rather than current, operatorship using our standard names (although our conclusions are not much affected by the difference). Figure 3 shows active operator counts by spud year for Bakken Shale in North Dakota with the use of historical operator names. This shows that if we consider the original operator names (including all currently non-existent legal entities), the active operator count in Bakken ND peaked at 61 companies in 2010 and bottomed out at 28 in 2016. This corresponds to a reduction of approximately 55%. In turn, when using our current standard names, we see a peak-to-trough reduction of 49% between 2011 and 2016. Similar slight changes in the magnitude of operator count reduction can be observed for other mature unconventional basins.