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Denver driller joins Permian Basin land rush with $1.6 billion deal

A Denver-based driller is spending $1.6 billion to expand in West Texas, adding to soaring deal activity in the prolific Permian Basin.

SM Energy is shedding oil and natural gas assets in North Dakota and buying 35,700 acres from QStar LLC, a portfolio company of Houston-based EnCap Investments, for $1.1 billion in cash and $500 million in stock. The purchase will expand its footprint in the Permian’s Midland Basin to approximately 82,450 net acres. In North Dakota, SM agreed to sell its Williston Basin assets near Divide County for $785 million to Oasis Petroleum.

Rising production and lower costs from drilling into multiple layers of oil and gas-laden rock have driven a land rush in the Permian this year with more than 30 deals worth more than $16 billion, according to data compiled by Bloomberg Intelligence. SM closed another $980 million Permian purchase this month. Dallas-based RSP Permian agreed to pay a record $45,000 an acre for Permian drilling rights last week.

“Everyone is looking to get bigger in the Permian,” said Peter Pulikkan, an energy analyst for Bloomberg Intelligence. “The industry consensus is moving toward the idea that the best acreage in the country is in the Permian and if you want to high-grade your portfolio, you should get bigger in the Permian.”

The deal nearly doubled SM’s Midland Basin holdings, for which it paid about $42,000 an acre, Capital One analyst Brian Velie wrote in a research report.

The Midland assets border the 24,800 acres SM purchased earlier this month from Rock Oil Holdings LLC. The addition brings the company “significant scale” in the Midland Basin, Chief Executive Officer Jay Ottoson said in the statement. The company raised its 2016 capital program excluding acquisitions to $710 million from as much as $690 million earlier. It plans to add a fourth Midland rig this quarter and increase to six rigs early next year.

Oasis, a specialist in the Williston Basin, is adding 55,000 acres there, the Houston-based company said in a separate statement. Production from wells in the region has exceeded expectations, the company said. It reported third-quarter average daily production equivalent to 48,509 barrels of oil, and raised its full-year forecast to as much as 50,000 barrels a day.

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