For a place as decidedly flat as the Permian Basin, entry into West Texas’ oil lands is becoming a steep proposition.

Since July, more than $6 billion in acquisitions have been made in the Midland and Delaware basins. The two largest, both in August, combined for more than $3.1 billion in less than two weeks.

PDC Energy Inc. (NASDAQ: PDCE) said Aug. 23 it will acquire 57,000 net acres in the Delaware Basin for $1.5 billion.

While the Permian Basin has been on a sustained high of deal making, Subash Chandra, an analyst at Guggenheim Securities LLC, said the deals keep coming because most of the E&Ps involved are in “peak decay mode.”

Companies are focusing on production while growth in their reserves is at a standstill “because they are not exploring, and they’re not going to get a reserve bump from crude prices this year,” he told Oil and Gas Investor.

“So that’s why you’re seeing all these acquisitions in the Permian, because that’s where most of the inventory is, especially in the Delaware,” Chandra said. “They are in effect saying, ’We can sell the dream and finance it.’ ”

PDC said its Delaware deal adds another core to its holdings that is “transformational” for the company. Chandra said that is exactly what is drawing companies to the Permian. Doing a deal has to be transformational “and the only place you can do that is the Delaware,” he said.

Conundrum

In fact, PDC faced an “inventory conundrum” in the Denver-Julesburg (D-J) Basin, said Mike Kelly, analyst at Seaport Global Securities LLC.

The deal was “a wise strategic direction for PDCE, whose stock has been in limbo due to limited core running room in the Wattenberg,” Kelly said.

The acquisition represents a strategic step outside of the D-J, where the company has about 100,000 net acres and an estimated 8 to 11 years of drilling inventory, said David Tameron, senior analyst at Wells Fargo Securities LLC.

PDC said the Delaware position offers it another 15 to 20 years of gross inventory.

PDC will pay for the transaction with $915 million cash and more than 9 million shares valued at $590 million, said Jeffrey W. Robertson, analyst at Barclays Research. PDC has $1.4 billion in liquidity from cash and financing.

Barclays rated the company Overweight, saying “development of the Wattenberg Field and Delaware Basin could allow PDC to deliver peer-leading balance sheet-adjusted production growth for several years.”

The equity price boost of about 6% for PDCE on the day of its Permian announcement may spur further interest from companies outside the basin as investors reward resource enhancement over equity dilution, Tudor, Pickering, Holt & Co. (TPH) said.

Investor feedback indicates that entering or increasing a position in the Permian helps change the growth, return profile and margin dynamic for operators.

“While the price of poker is high, those who want to play have no choice but to ante up,” TPH said. “We would not be surprised if this pushes deal valuations higher for core acreage and brings bidders into the market for more marginal deals that existing operators may have pushed to the back of their inventory queue.”

The Frenzy

The Permian offers thousands of square miles and a litany of private companies with public E&Ps wanting to pick off their assets, Chandra said.

“The Permian is a frenzy,” he said. “It’s like the Haynesville I remember as a perfect storm of shale hysteria combined with high commodity prices, when companies that did a deal saw their stock price rise 20% in one day. But how did it end up? For some, not well.”

Prices in the Permian have been high, but consistent through August, despite commodity stickiness of about $45 per barrel of crude.

PDC is paying roughly $30,000/acre for the Delaware acreage position, Kelly said.

Similarly, on Aug. 8, SM Energy Co. (NYSE: SM) purchased 24,783 net acres in Howard County, Texas, for $980 million, or about $28,000 to $30,000 per Midland Basin acre.

On Aug. 15, Concho Resources Inc. (NYSE: CXO) that it would buy 40,000 net acres from Reliance Energy for $1.625 billion—about $31,000 per acre.

Other companies have paid similar acreage prices since July, including Diamondback Energy Inc.’s (NASDAQ: FANG) deal for Luxe Energy LLC and Silver Run Acquisition Corp.’s (NASDAQ: SRAQ) purchase of Centennial Resource Production LLC.

PDC expects to spend about $55 million to $65 million in the Delaware Basin for the remainder of 2016. The company's plans this year include spudding about nine horizontal wells and expanding certain midstream infrastructure.

The transaction is expected to close in fourth-quarter 2016.

Leslie Haines contributed to this report.

Darren Barbee can be reached at dbarbee@hartenergy.com.