$3.8B Permian Basin midstream merger reported amid potential decline in oil production

A global oil and gas leader planned to merge with a midstream oil and gas company in the Permian Basin in a deal valued at $3.8 billion, according to a company announcement issued Friday.

Phillips 66 said it reached an agreement to acquire all interests in DCP Midstream, and the transaction was expected to close in the second quarter of 2023 after it was recently approved by officials from both companies.

Headquartered in Denver, DCP is a leading midstream operator throughout the Permian Basin in southeast New Mexico and West Texas, operating pipelines and fossil fuel processing facilities throughout the region.

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The acquisition was expected to generate about $1 billion in revenue for Phillips 66, the announcement read.

Chief Executive Officer of Phillips 66 Mark Lashier said the deal would help boost the company’s natural gas liquids (NGL) business, aiming for an additional $300 million in income as the DCP’s assets are integrated.

“We are delivering on our commitment to grow our NGL business,” Lashier said. “Our wellhead-to-market platform captures the full NGL value chain. As we continue integrating DCP Midstream, we are unlocking significant synergies and growth opportunities.”

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As some operators sought to increase their presence in the Permian, others warned of potential future declines in operations.

Pioneer Natural Resources reported in an investor meeting Jan. 5 it was lowering its Permian Basin-wide production forecast for 2030 to 7 million barrels per day (bpd), down from a previous 8 million bpd forecast.

CEO Scott Sheffield said this was due to drillers using up inventory of available fossil fuel resources, and shifting to other formations in both the eastern Delaware sub-basing and western Midland Basin within the Permian region.

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“The reason we've lowered it is that people – obviously, the effects of moving to what I call stack development in both the Delaware and also in the Midland basin,” Sheffield said, according to a transcript of the meeting.

“It's better to drill four wells or six wells, all at the same time to get the best performance. Also, there is a lot of companies that are moving – they're running out of inventory. They are moving to tier two and tier three inventory.”

He said only three companies would produce a million or more bpd by the end of the decade: oil giants Chevron, ConocoPhillips and Pioneer.

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“They are the only three that have a inventory that deep, can take it over a million barrels of oil equivalent per day,” Sheffield said.

The U.S. Energy Information Administration (EIA) estimated the Permian Basin would produce about 5.58 million bpd in January, up about 37,000 bpd from last month’s production of about 5.54 million bpd.

That was about half of the about 11.7 million bpd the U.S. produced in 2022, according to the EIA, and the most of any other oil-producing region in the U.S.

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But Sheffield said over time, companies would begin seeing a larger percentage of natural gas being produced alongside crude oil.

“Now what's going to happen over time. The gas/oil ratios in the entire Permian Basin will continue to go up,” he said according to the transcript. “We're seeing that. You'll see the percent oil drop for all those companies, most likely below 50 percent over the next 10 years.”

Oil and gas drilling rigs in the Permian maintained a total of 353 basin-wide in the last week, although New Mexico dropped two rigs for its total of 100 rigs as of Jan. 6, according to the latest data from Baker Hughes – the second-most in the U.S.

Texas led the nation after adding two rigs, Baker Hughes reported, for its total of 378 rigs as of Jan. 6.

Oil prices were expected to rise slightly in the coming months, according to futures reports from the Chicago Mercantile Exchange, from Monday’s price of $74.9 a barrel, up to $75.7 by June, but then drop gradually in the months after that to $74.2 a barrel by the end of 2023.

The latest price marked a steady decline since the start of the year from about $80 a barrel reported on Dec. 30, 2022, according to historical data from Nasdaq.

Adrian Hedden can be reached at 575-628-5516, achedden@currentargus.com or @AdrianHedden on Twitter.

This article originally appeared on Carlsbad Current-Argus: $3.8B merger reported amid potential decline in Permian Basin oil output