What Does Record BLM Oil & Gas Lease Auction Mean For Valuation?

Opportune LLP

On September 7, 2018 the Bureau of Land Management’s (BLM) third-quarter oil and gas lease sale in New Mexico broke all previous records for BLM lease sales across the country, generating $972.48 million in bonus bids for 142 parcels in Eddy, Lea and Chaves counties.

The two-day, online auction easily outpaced what used to be the BLM’s largest ever oil and gas lease sales year in 2008, which generated $408.63 million, and easily surpassed what BLM earned from all sales nationwide last year ($358 million).

In addition to the record total bonus bids, the first day of the sale also resulted in a national record for the highest bid for a single parcel, and the highest per-acre bid ever placed. The winning bid for a 1,240-acre parcel in Eddy County was $81,889 per acre, bringing in more than $101.5 million. The previous record for a single parcel was $76.680 million, set in September 2016 in New Mexico. The previous record for a per-acre bid was $40,001 set in New Mexico in December 2017.

September 2018 BLM Oil/Gas Lease Sale Auction Results
(Source: Ralph E. Davis Associates)

Forty-eight percent of the revenue from lease sales goes to the state, while the rest goes to the U.S. Treasury. If the leases result in producing oil or gas wells, revenue from royalties based on production are also shared with the state.

A bonus bid is a one-time payment in exchange for exclusive access to explore a parcel and grants an exclusive lease for a set period of time. The BLM awards oil and gas leases for a term of 10 years and as long thereafter as there is production of oil and gas in paying quantities.

Notably, it was reported that Matador Resources Co. was the anonymous purchaser of drilling rights in the lease auction sale that fetched a record $95,001 per acre. The lease was part of the $387 million the Dallas-based company spent on 8,400 net acres in the Permian’s Delaware Basin.

The record-breaking auction is a reflection of booming oil and gas production in the prolific Permian Basin in West Texas and southeastern New Mexico. Oil output is averaging 3.6 million barrels per day (MMbbl/d) in November 2018, while natural gas production is averaging 12.16 million cubic feet per day (MMcf/d), according to figures from the U.S. Energy Information Administration (EIA).

What Does It Mean For Oil & Gas Valuation?

There is no question that the Permian Basin has been red hot since commodity prices declined in 2014. We have seen valuations trend higher as a result; however, the $81,889/acre paid for the parcel in Eddy County appears to be an outlier and will likely be treated as such in Permian Basin valuations. This sentiment appears to be shared by our clients with operations in the region. Moreover, the Permian Basin will continue to be a hot-bed for M&A and drilling activity; however, the ability for acreage prices to continue to climb cannot continue without the prospects for higher long-term crude oil prices.

Written by:

Opportune LLP

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