The Opportunity of the Permian Basin

on April 04, 2017 at 10:16 AM

The Permian Basin has been one of the largest producers of oil in the United States since December 2016. Spurred by the profit incentives of high oil prices due to OPEC supply cutbacks, these Western Texas rigs are some of the fastest growing in the country, and as a result, analysts are issuing recommendations to invest in the Basin.Domestic Oil And Gas Production

One such analyst is from Seaport Global Securities, Mike Kelly, claims that some of the best oil companies with the best investment potential are situated along the Permian Basin. Seaport’s most recent note to clients reaffirms this positive outlook, which is based on what they perceive as industry wide sandbagging. Kelly cites the swings in oil prices as having been encouraging for these firms to continue their investments. Kelly also notes the low costs associated with drilling there, along with the high volume of production, as reason alone to invest. This is largely due to the amount of reserves found in the basin. This presents many opportunities, according to the firm.

Indeed, the change in cost structure of these shale fields can provide even more insight into the investment potential that Kelly and Seaport see in the Basin. Over the past two years, costs associated with oil production have dropped by nearly 50%.

Midland drillers (a section of the Permian Basin) used to pump out a barrel of oil for total cost of $71, according to a report released by a Norwegian energy research group, RystadEnergy. In 2016, these same costs fell to $36 a barrel, nearly half of what it used to be.

About 25% of the savings are associated with efficiency improvements in the drilling technology used by these rigs. However, 57% of those savings were derived from lower drilling costs – the two-year price crash has allowed rig operators to squeeze oil field service companies. The last 18% of savings come from “high-grading,” which is a practice whereby oil companies move their drilling operations to their best – highest volume producing – land.

The oil price crash of 2014 cause companies to stop drilling. When operations resumed, they moved to locations with the most oil – where the return on investment would be the highest. This is called “core” acreage. According to report by Rystad, companies drilled in their core acreage about 60% of the time in 2014. By 2016, that number was up to 80%. As a result, wellhead break-even prices plummeted, allowing even more profit to be extracted.

Over $28 billion was spent purchasing land along the Permian Basin in 2016 by the oil and gas industry. That’s more than three times as much as was invested in 2015. However, many experts believe that these land purchases are indicative of much larger investments that will be needed in the near future to continue extracting oil at the same pace.

The Permian Basin remains essential to the oil industry in the United States. Texas is the largest oil-producing state, and accounts for approximately 25% of total oil production in the country. The Permian Basin alone accounts for 14% of the country’s total output. The growth prospects are not radical, as the production is not simply legacy oil fields; new shale discoveries are normal in the state.

Thousands of oil fields pepper the Texan landscape, but many do not produce a number close to that of the Permian Basin and the other monster field located at Eagle Ford.

On Friday, March 31st, oil prices fell after a three-day rally. Some think we could be heading into the worst quarter for the oil market since 2015. Worries are spurred by the quick growth of U.S. oil supplies, which are undermining the cutbacks and price support established by OPEC. On Friday, oil closed at $50.60 per barrel, a 5.8% fall in price.