Rising Production, Attractive Geology Draw Producers to the Permian Basin

Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--U.S. crude oil production from unconventional formations is surging, recapturing ground lost since prices collapsed in late 2014. The Permian Basin, located in West Texas and southeastern New Mexico, is driving the industry's recent turnaround. During crude oil's two-year swoon, from late 2014 to late 2016, production in the Permian fell far less than production in the other unconventional formations, helping to keep a bad story from becoming worse. Now, with higher prices, production from the Permian is surging.

Crude oil production from seven U.S. unconventional formations in April is expected to increase by about 109,000 barrels per day (BBL/d) compared to March, according to the U.S. Energy Information Administration (EIA), the statistical and analytic branch of the U.S. Department of Energy (DoE) (Washington, D.C.). Rising production from the Permian accounts for about 79,000 BBL/d of that 109,000 BBL/d month-over-month growth.

March's production from seven unconventional formations increased by 80,000 BBL/d compared to the previous month, EIA said in its "Drilling Productivity Report." About 70,000 BBL/d day of that growth came from the Permian. The other six unconventional basins registered just a 10,000 BBL/d increase over the prior month's production. For January and February, production from the Permian turned national production declines in unconventional formations into gains on a month-over-month basis, EIA data showed.

Click on the image at right to see estimated crude-oil production from seven U.S. unconventional formations, compared with estimated production from the Permian Basin.

During the fourth quarter of 2016, production gains from the Permian offset month-over-month declines in production from the nation's six other unconventional formations.

Crude-oil production in the Permian is expected to reach 2.2 million BBL/d next month, EIA said. More crude oil is produced from the Permian than any other unconventional formation in the U.S.

Click on the image at right to see a graphic on crude-oil production in the Permian.

Surging production in the Permian, coupled with higher crude-oil prices and the availability of local processing plants and take-away pipeline capacity, helps explain the recent flurry of mergers and acreage purchases in West Texas and southeastern New Mexico. On March 9, Marathon Oil Corporation (NYSE:MRO) (Houston, Ohio) paid $1.1 billion in cash to acquire acreage in the Permian Basin at an average price of about $13,900 per acre, adjusted for current production. That transaction, Marathon's entry into the Permian, was followed two weeks later with a second deal in which it paid $700 million in cash to buy about 21,000 acres of land in the same general area: New Mexico's Northern Delaware Basin, which is part of the Permian. Marathon paid about $33,333 per acre in the second transaction, which was announced March 21.

In announcing both deals, Marathon said the area was attractive because some parts of it had about 5,000 vertical feet of oil-rich stacked pays, referring to the multiple layers of hydrocarbon-rich rock piled atop each other, from which oil and gas can be extracted.

Marathon said its second purchase of land would generate pre-tax internal rates of return in excess of 90% when West Texas Intermediate (WTI) crude oil was priced at $55 per barrel, the company said.

Some companies reportedly have paid even more than Marathon--as much as $60,000 per acre--to acquire acreage in the Permian, a dramatic increase from prices paid four years ago, according to consultants Wood Mackenzie Limited (Edinburgh, Scotland). Day rates to rent advanced drilling rigs in the Permian reportedly are up 17% this year compared to 2016. Frac sand costs in the region are said to be up about 20% compared to last year.

The Permian's attractive geology, low costs and access to processing and transportation infrastructure also drew multibillion-dollar investments from Noble Energy Incorporated (NYSE:NBL) (Houston, Texas) and ExxonMobil Corporation (NYSE:XOM) (Irving, Texas) earlier this year.

Industrial Info is tracking 131 active Oil & Gas production and processing projects valued at about $3.6 billion in the West Texas counties that comprise that state's share of the Permian basin.

In mid-January, Exxon Mobil agreed to pay up to $6.6 billion to acquire 250,000 acres of Permian Basin land and associated production from companies owned by the Bass family of Fort Worth, Texas. Most of the price will be paid in Exxon Mobil's stock. The deal is expected to more than double Exxon Mobil's hydrocarbon resources in the Permian Basin, to more than 6 billion barrels of oil equivalent. The acreage Exxon Mobil acquired is in New Mexico's Delaware Basin, which is part of the Permian. Liquids account for about 75% of the hydrocarbons acquired by Exxon Mobil in that deal.

Also in mid-January, Noble paid about $2.7 billion to acquire Clayton Williams Energy Incorporated (NYSE:CWEI) (Midland, Texas), which added 71,000 highly contiguous net acres in the core of the Southern Delaware Basin in Reeves and Ward counties in Texas that were directly adjacent to Noble Energy's existing 47,200 net acres there. In addition, another 100,000 net acres in other parts of the Permian changed hands in that deal.

That deal, announced in mid-January, followed by a week the closure of previously announced deals where Noble spent about $300 million in cash to acquire about 7,200 acres of land that could be "bolted on" to its existing acreage.

Last July, Apache Corporation (NYSE:APA) (Houston, Texas), increased its 2016 capital budget by $200 million to more fully develop the promising Alpine High play in West Texas. That same month, Diamondback Energy (NASDAQ:FANG) (Midland, Texas) spent $560 million to acquire West Texas acreage from an unnamed company. Earlier this month, Diamondback closed on its $2.55 billion acquisition of 80,185 net leasehold acres in West Texas' Pecos and Reeves counties.

According to a report in Forbes, Vicki Hollub, chief executive of Occidental Petroleum (NYSE:OXY) (Houston, Texas), said she thinks production in the Permian could more than double to as much as 5 million barrels per day, depending on the right price environment. "Right now there are significant opportunities that are economical to develop under $40 per barrel," she said. Occidental is one of the largest producers in the Permian. She made her comments at CERAWeek, a large industry conference in Houston, earlier this month.

According to some estimates, there have been $26 billion of deals in the Permian over the last year, leaving some to wonder if there are any affordable and cost-effective acquisitions remaining. "If a client came to me and said they could spend $1 billion to $2 billion, there would only be four to five names I could point to, versus 20 last year," Tudor, Pickering & Holt investment banker Maynard Holt told the CERAWeek event, according to Forbes.

In addition to Occidental, other large players in the Permian include EOG Resources Incorporated (NYSE:EOG) (Houston, Texas), Pioneer Natural Resources Company (NYSE:PXD) (Irving, Texas), Concho Resources Incorporated (NYSE:CXO) (Midland, Texas) and Cimarex Energy Company (NYSE:XEC) (Denver, Colorado).

"Crude oil is a boom and bust industry," commented Jesus Davis, Industrial Info's vice president of research for Oil & Gas Production, Pipelines and Terminals industries. "When crude oil prices collapsed in late 2014, the cost of acreage and services declined everywhere, including the Permian. But now that crude-oil prices basically doubled this year, acreage and services all cost more. The smart money got in early, bought when prices were low and aggressively managed their costs. Whether the current transactions make economic sense depends on the future price of crude oil as well as companies' ability to run a lean operation, because prices can fall as fast as they rise."

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, five offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com.