(This April 18 story has been corrected to fix the title to director, not CEO, in paragraph 4)
By Mrinalika Roy
(Reuters) - Companies with a focus on the oil-rich Permian basin are likely to be at the center of the next wave of consolidation in the U.S. energy sector as favorable oil prices prompt cash-rich drillers to tap into the largest source of shale oil.
Top producers have built a war chest to fund acquisitions after reaping windfall profit in 2022 from skyrocketing oil prices following Russia's invasion of Ukraine.
The current oil prices are only making Permian assets more attractive to companies looking to quickly rebuild their depleting assets to take advantage of the world's never-ending thirst for fossil fuel.
"I think we're in a good spot in terms of oil pricing for M&A, somewhere around $80 per barrel is where both buyers and sellers feel comfortable," said Andrew Dittmar, a director at consultancy Enverus.
"For all of 2023, we're likely going to have a very active market and we're gonna continue to see these deals hit."
At least three analysts have identified Diamondback (NASDAQ:FANG) Energy Inc, Matador Resources (NYSE:MTDR) Inc and Permian Resources Corp as possible takeout targets.
These companies have the highest quality of remaining inventory as well as strong balance sheets and free cash flow, making them good picks, said Gabriele Sorbara, managing director of equity research at Siebert Williams Shank & Co.
Graphic: U.S. E&Ps' free cash flow - https://www.reuters.com/graphics/USOIL-DEALS/GRAPHIC/byvrlxwbzve/chart.png
Diamondback ended 2022 with $2.8 billion in free cash flow and proved undeveloped oil and natural gas reserves of 629,418 million barrels of oil equivalent (BOE), while Matador had $1.16 billion free cash flow and proved undeveloped reserves of 135.2 million BOE.
Permian is an obvious target for producers looking to increase their inventory. The shale patch, which lies between Texas and New Mexico, has the necessary infrastructure and is known for high productivity and large undeveloped reserves.
Its proven, technically recoverable reserves are estimated at 50 billion barrels of crude and nearly 300 trillion cubic feet of natural gas.
Upstream activities had fallen out of favor with investors as producers grappled with rising costs, while facing pressure to return money to their shareholders. But a surge in oil prices last year helped turn the tide.
Crude prices in 2022 rose to their highest inflation-adjusted price since 2014. Brent crude touched a record high of $139.5 per barrel last year and has averaged $82.6 per barrel so far in 2023.
Enverus' Dittmar, who focuses on mergers and acquisitions, expects top producers such as Marathon Oil Corp (NYSE:MRO) and Devon Energy (NYSE:DVN) to emerge as likely buyers
Dittmar also expects blockbuster deals from Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) in the Permian basin in the next couple of years. The two companies have already indicated they are open to more acquisitions.
Last week, ConocoPhillips (NYSE:COP) CEO Ryan Lance said he was expecting more shale deals, adding that "consolidation needs to happen" among Permian Basin energy producers.