Beyond their spatial relationship, the Delaware and Midland basins were separated from one another in one key way until this year: value.

Since the early part of 2016, the Delaware has been rapidly rising to Midland-level prices. First-quarter A&D in the southern Delaware averaged $13,700 per acre. By the third quarter, acreage values more than doubled to $29,800.

Two recent transactions show the two basins as equals, at least in spending. Whether money is to be made on the acquisitions—executive teams are confident—may depend on how many wells can be squeezed together and by a race to the bottom as they drill to pay zones to make cash.

Both basins can take advantage of multiple benches under the surface, which can provide more production than other plays. However, prospective locations aside, what’s been announced is what they have to work with.

On Oct. 18, SM Energy Co. (NYSE: SM) purchased 37,500 Midland Basin acres for $1.6 billion including $500 million in stock. The purchase adds blocky leasehold to SM’s already sizeable position, which will total 82,450 net acres after closing.

“Pricey Midland Basin acquisition,” is how Pearce Hammond, senior research analyst for Piper Jaffray & Co., described the deal.

Discounting for production, SM paid $41,450 per acre—about 40% more than its August acquisition of Howard County, Texas, acreage for $25,000 per acre.

While the acquisition appears expensive, the improved long-term drilling inventory put it on track for upside of about 25%, Hammond said.

Margin Of Error

The big deal for the Delaware was just five days earlier, as RSP Permian Inc. (NYSE: RSPP) set a new ceiling on its purchase of Silver Hill Energy Partners LLC for $2.4 billion.

On Oct. 10, Diamondback Energy Inc. (NASDAQ: FANG) said rumored discussions to buy Silver Hill Energy Partners LLC had ended with the point at $2.5 billion. The purchase includes about one-fifth of Diamondback’s stock to Silver Hill, making the company its largest single stockholder.

Irene Haas, an analyst at Wunderlich Securities, said the estimated price per net acre is $45,000— eclipsing SM’s Midland price point.

“This is a big number, but we believe it is worth considering that the asset comes with 15,000 barrels of oil equivalent per day, multiple pays and two rigs running on a very contiguous land base,” Haas said.

In an Oct. 14 conference call, RSP CEO Steve Gray, said the company wanted to buy properties that would immediately compete for capital and not dilute the quality of its other properties, including its Midland acreage.

“I know that a lot of people may be surprised at the prices that the assets in the Delaware Basin are starting to command,” he said. “But as we have studied this basin the past two years, it’s obvious wells are getting better, costs are coming down and returns are increasing as operators delineate the best landing zones and improve their completion methods.”

Gray said that what stood out to him was the thickness of the Delaware’s interval compared to the company’s Midland assets.

“The pay here is roughly twice as thick as in the Midland Basin, and therefore it can support more wells per section,” he said. “Because of the thickness, our estimated cost per location and estimated cost per barrel of reserves acquired is actually lower here than deals we have purchased previously over the last few years.”

Strategically, the deal makes sense for RSP, said Kashy Harrison, senior research analyst at Piper Jaffray.

“RSPP believes it can achieve similar recovery factors in the Delaware as it does in the Midland, which is interesting given RSPP's current downspacing endeavors on its Midland properties,” Harrison said. “Admittedly, the high dollar-per-acre consideration reduces the operational margin for error on the acquisition.”

Spatial Relationships

Space is a key to discussions about the Permian and its escalation valuation.

David Tameron, senior analyst at Wells Fargo Securities, noted on Oct. 3 that acreage costs are, in some cases, exceeding $40,000 or $50,000.

“Prices in excess of $30,000 per acre become difficult to justify without more aggressive assumptions around well spacing and performance, commodity prices, and—not or—timing of development,” Tameron said. “As the price tag goes up it becomes … important for operators to drill” immediately and at strong prices to hit desired returns.

Asked by analysts about well spacing, Gray said he did not want to divulge RSP’s specifics for competitive reasons. However, he said that the company would “bring across the type of spacing we are doing currently in Midland.” In certain areas, RSP well spacing is about 400 feet, he said.

“The main thing we’re looking at there is the thickness and the oil in play,” Gray said.

Haas also that upside from current inventory of 1,950 net locations should increase as more horizontal locations get proven up. In the Midland, the company has an inventory of 1,700 net locations.

SM’s deal may face different challenges. The company said that, following the deal, its locations would increase to 4,171.

Hammond said a more conservative estimate is 3,437 “in light of the exploratory nature of some of the SM acreage located further east in Howard County.”

And Tudor, Pickering, Holt and Co. (TPH) also weighed in on the SM purchase, saying the company picked up good acreage, but northern Howard “could be viewed as carrying greater geological risk or fewer prospective zones by investors.”

TPH noted that some of the purchase includes a large block located in northern Howard and in northeastern Martin County, Texas.

“Well control is limited and prospective zones could be fewer vs. the core of the basin as well,” TPH said. “We still view a large portion of the acreage in western Howard and eastern Martin counties as very good.”

Tameron said breakeven points are tracking at about $32 per barrel in major crude basins in the Lower 48.

“Well-spacing is the biggest driver of upside potential,” he said. “More wells per section equal more resource potential and greater future cash flows.”

Tameron said having about 36 wells or more per section suggests better outcomes with resource recovery.

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