Newsletter Dec 9th, 2025

MARKET PULSE
What the SM–Civitas Merger Signals for the Future of Multi-Basin Operators

The recently announced $12.8 billion all-stock merger between SM Energy and Civitas Resources marks one of the most strategically important consolidations of the year. While headlines highlight scale, the real story is how the combined company is positioning itself for the next decade of disciplined, high-margin development.

The merged operator will control more than 820,000 net acres across the Permian and DJ Basins, producing roughly 325,000 boe/d with significant free cash flow potential. Both companies already share a similar philosophy: steady production, strong balance sheets, and capital allocation tied to returns—not volume. Their combination amplifies this mindset.

What this means going forward:

1. A deeper, higher-quality drilling inventory

By integrating Civitas’ DJ Basin assets with SM’s Permian and legacy Uinta/Eagle Ford positions, the company inherits a more diversified set of locations — and the ability to high-grade future development to the most profitable zones.

2. Stronger negotiating power and operational efficiency

Scale allows the new entity to capture meaningful synergies in service costs, midstream contracts, and infrastructure utilization. Management has already signaled $200–300 million in annual synergies.

3. A continued shift toward disciplined, multi-basin capital programs

The combined company is expected to prioritize free cash flow over aggressive growth, mirroring broader industry trends. This results in a more predictable development cadence — beneficial for mineral and royalty owners tied to their acreage.

4. Potential portfolio reshuffling

With a larger footprint, the company may divest non-core assets to sharpen focus on its highest-return rock. This often creates opportunities for royalty buyers and mineral aggregators.

The SM–Civitas merger isn’t just about getting bigger — it’s about getting better. And it signals that the next phase of consolidation will be driven by portfolio quality, not sheer scale.

ROYALTY SPOTLIGHT 
How Royalty Checks Are Calculated

One of the most common questions we receive is:
“How exactly is my royalty check calculated?”

While royalty income is simple in concept — you’re paid a share of production — the math behind each check involves several key components. Understanding these inputs helps investors set realistic expectations and interpret monthly fluctuations with confidence.

1. Production Volumes (Oil, Gas & NGLs)

Your royalty share begins with the actual production from the wells tied to your mineral interest. Operators report volumes for each product stream, and your payment is based on your decimal interest multiplied by those volumes.

2. Realized Prices vs Benchmark Prices

WTI and Henry Hub are only starting points. Operators sell production at the realized price, which reflects:

• Local market conditions

• Transportation and gathering fees

• Quality adjustments (gravity, BTU content, shrinkage)

Realized pricing often explains most month-to-month variation in royalty income.

3. Post-Production Deductions

Depending on lease terms, operators may deduct certain costs between the wellhead and point of sale, such as:

• Gathering

• Compression

• Dehydration

• Marketing

• Transportation

Some leases are cost-free (no deductions), while others allow specific charges. PetroPeak heavily favors assets with clean, transparent deduction structures.

4. Severance & Production Taxes

States impose taxes on produced hydrocarbons (usually 4%–7%). These are automatically withheld before your revenue is distributed.

Putting It All Together

Royalty Income = (Production Volumes × Realized Price × Your Decimal Interest) – Taxes – Allowed Deductions

This formula is the backbone of every royalty check — and understanding it gives investors clearer insight into the value and stability of mineral ownership.

BASIN FOCUS
Pearsall Shale — A “New Again” Oil Window in South Texas

After more than a decade sitting in the “science project” bucket, the Pearsall Shale is back on the radar. The formation underlies much of the Eagle Ford fairway in the Maverick Basin (Frio, Zavala, Dimmit and surrounding counties) and was historically viewed as a deep, gas-weighted concept play. Today, new wells and much more aggressive completions are giving the Pearsall a second life as an oily target.

Formentera Partners is leading the charge. In April, its Hurrikain Cat I-STX #S731H in Frio County tested 1,499 bbl/d of oil and 4 MMcf/d of gas from the Lower Bexar member — one of the most encouraging Pearsall results reported in years. Subsequent wildcats have IP’d in the 600–1,200 bbl/d range, and Formentera plus EOG have now pulled permits for a total of 22 Pearsall oil wildcats, signaling a real delineation program rather than a one-off curiosity.

On the EOG side, the company has permitted at least a third Pearsall test in South Texas, bringing the actively delineated oil window to roughly 70 square miles shared between the two operators. Formentera has also marketed a Pearsall/Eagle Ford development package of roughly 38,600 net acres, with targeted 20–25% IRR and ~3x MOIC, underscoring the return profile they believe modern frac designs can unlock. Local reports point to renewed leasing activity in Frio County as mineral owners respond to the early results.

What’s Next — and Why It Matters for PetroPeak’s Thesis

From an investor’s perspective, the Pearsall represents early-stage upside layered beneath (and around) proven Eagle Ford and Austin Chalk development. The play is still in the “prove-it” phase, but if results hold, you get:

• Oil-weighted, stacked-pay potential in an already infrastructure-rich corridor

• Incremental drilling locations on acreage that many thought was “fully understood”

• Higher-margin wells if costs stay in check and IPs remain competitive

For PetroPeak, this isn’t a call to chase speculative rock. Instead, it reinforces our core thesis:

By targeting minerals in stacked, multi-zone fairways operated by companies like EOG and high-performing privates, we position investors to benefit if plays like the Pearsall graduate from “experiment” to “development program” — while still being anchored by established, cash-flowing horizons above.

INVESTOR ADVANTAGE 
Why Basin and Operator Selection Matter More Than Ever

In today’s energy landscape, what you own matters — but where you own it matters even more. As operators continue to high-grade their portfolios, consolidate assets, and reallocate capital toward their best rock, the importance of basin and operator selection has never been clearer.

Recent moves across the industry tell the story:

• SM Energy and Civitas merging to deepen multi-basin scale and focus capital on their most productive acreage.

• Baytex exiting the Eagle Ford to deploy capital into the higher-return Montney and Duvernay.

• EOG and Formentera aggressively testing the Pearsall oil window in South Texas.

• Exxon, Chevron, and Continental signaling that exploration and long-life inventory capture are back in focus.

All of these decisions reflect one thing: operators are concentrating capital where returns are strongest.

For royalty investors, this matters enormously. Mineral interests located in high-graded basins — and operated by top-tier companies — benefit from:

• More consistent drilling schedules

• Better well performance and EURs

• Lower breakevens and stronger margins

• Higher resilience during commodity downturns

• Greater long-term development visibility

In contrast, minerals tied to second-tier acreage often see sporadic drilling, unpredictable payments, and limited upside.

At PetroPeak, basin and operator quality form the foundation of our acquisition strategy. We intentionally target minerals in areas where leading operators are investing real capital today and where future inventory remains deep. The result is an income stream anchored in the best-performing rock — not the leftover edges of a basin.

Because in a world of disciplined capital and selective drilling, the winners are the minerals positioned where operators choose to spend their next dollar.

LOOKING AHEAD 
Positioning Your Portfolio for 2026

As we move toward year-end, many investors begin reassessing allocations, locking in gains, and repositioning for the year ahead. With operators tightening capital plans, consolidating assets, and focusing on the highest-quality acreage, 2026 is shaping up to be another year defined by discipline — not runaway growth.

For investors, this environment reinforces the value of durable, asset-backed income streams like oil and gas royalties. As corporate portfolios sharpen and drilling programs focus on core acreage, royalty owners tied to these high-graded areas often see more predictable development and stronger long-term cash flow.

If you're evaluating where to allocate capital before year-end, this is an ideal time to explore how adding mineral and royalty interests can bring stability, tax advantages, and commodity-linked upside to your portfolio heading into 2026.

Now is the moment to position for the next cycle — not after it's already begun.

Ways to Connect with Us:
Email: [email protected] 
Website: www.petropeakinvest.com
Schedule a Call: Book a time here
Follow us on LinkedIn and socials: PetroPeak Investments LLC, @petropeakinvest

Whether you’re exploring royalties for the first time or looking to deepen your exposure, PetroPeak can guide you through every step — from understanding the asset class to participating in high-quality, cash-flowing deals.

Because at PetroPeak, it’s about more than just investing. It’s about building long-term income you can count on.

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