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SM Energy, Carrizo May Combine to Fortify Permian Operations

Zacks Equity Research
Investors need to pay close attention to Anadarko Petroleum (APC) stock based on the movements in the options market lately.

SM Energy Company SM recently had a discussion with Carrizo Oil & Gas, Inc. CRZO about a merger, reported Bloomberg.

Notably, the source didn’t provide any additional information on the potential merger deal. Moreover, there are possibilities that this early stage of discussion will not convert into an accord, the source added.

The intended deal of Carrizo to merge with SM Energy reflects the small upstream energy player’s focus to realize cost synergy amid intense competition in the prolific Permian basin, especially when the crude pricing scenario is extremely volatile.

In the Delaware Basin — portion of the broader Permian basin — Carrizo has a footprint of over 46,000 net acreage, covering net undrilled locations of more than 1,400. Notably, in the Delaware Basin, SM Energy has estimated its proved reserves at 180 million barrels of oil equivalent (MMBoE) as of 2018-end.

SM Energy also has a strong foothold in the Permian, where it reported roughly 97% production growth in 2018. The company is also planning to realize production growth of 20% through 2019. Importantly, SM Energy has decided to allocate 80% of its 2019 drilling and completion budget for the broader Permian.

Investors should know that not only small energy players are focusing on the Permian, big energy majors are also looking to strengthen operations in the prolific basin. Energy giants like Exxon Mobil Corporation XOM and Chevron Corporation CVX recently decided to produce a combined daily output of roughly 2 million barrels in the coming years from the Permian. The flow of fresh American oil might weaken OPEC’s power to control oil prices, according to Bloomberg.  

Another energy major willing to strengthen position in the Permian is Royal Dutch Shell plc RDS.A. Shell’s strategy is, however, different from that of ExxonMobil and Chevron. Instead of organic growth, Shell is reportedly willing to acquire smaller drillers struggling to meet investors’ demand for higher return owing to significant cost pressure.

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