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Subia Khan
Subia Khan
Articles (101) 

3 Value Creators From Permian Black Gold

These companies are positioned to benefit from one of the richest resources in the US

February 16, 2017 | About:

The Permian Basin is the richest oil resource in the U.S. It consists of Midland Basin, the Delaware Basin and the Marfa Basin. It is considered to be a gold mine for oil drillers because of its vast stretch. The Permian is 250 miles wide and 300 miles long across West Texas and Southeastern New Mexico.

Moreover, the field has several layers of oil-rich stone, and its layer is 10 to 15 times thicker than those in other basins. This gives the resource an advantage of more drilling opportunities, and because of its low drilling cost the companies can generate profit even with a crude oil price of $40 per barrel, which is not possible in other shale fields like Bakken and Eagle Ford.

Oil prices were in a state of depression for about two years in spite of which oil companies have been active in shale, and there was a rush of multimillion-dollar deals in the field. The shale is so rich that about one-quarter of the total spent in such transactions by the oil and gas industry worldwide is spent in acquisitions in the Permian Basin over the last year.

It was about a decade ago when experimentation with hydraulic fractions led to the discovery of multiple layers of shale. It is like a layered sandwich with eight to 10 oil-rich zones one on top of the other. One of the few companies who were involved in the discovery was Pioneer Natural Resources (NYSE:PXD), and the discovery now gives the companies opportunity to drill on the same field but through multiple layers of oil-rich reservoirs.

The presence of a robust array of pipelines have made the drilling really cheap at the basin with break-even price as low as $10 to $20 in some of the acreages. This has helped the operators in the region survive in tight oil market conditions; with oil prices trending higher, margin expansion is on the cards.

Some of the players in the Permian Basin who are most likely to benefit from their presence here are Occidental Petroleum (NYSE:OXY), Apache Petroleum (NYSE:APA) and Pioneer Natural Resources.

Occidental Petroleum

Occidental Petroleum is the largest operator and producer in the basin with approximately 13% of the total oil produced in the region. The company has around 5.4 million gross acres of its assets in the region with more than 13,000 operated gross oil and gas wells.

The company operates through Permian Resources and Permian EOR (Enhanced Oil Recovery) segments. In addition to this its midstream and marketing segments help in gathering, processing and transporting its products to multiple markets which gives them a competitive advantage over peers.

Occidental Petroleum also has strong fundamentals that will allow the company to make bigger capital investments as oil prices recover and that makes me bullish on the stock with a good production growth outlook.

Apache Corp.

Apache Corp. is also one of the big players in the Permian Basin with over 3.3 million gross acres of its assets situated in different parts of the basin. The company has more than 14,300 producing wells in 163 fields including 42 water floods and seven CO2 floods.

One of the recent discoveries of Alpine High is a significant new resource addition to the company’s portfolio. Alpine High acreage lies in the southern part of the Delaware Basin, primarily in Reeves County, Texas.

According to the company’s estimate there are 75 trillion cubic feet (Tcf) of rich gas (more than 1,300 British Thermal Units) and 3 billion barrels of oil in the Barnett and Woodford formations alone.

The region has 4,000 to 5,000 feet of stacked layers with five distinct formations including the Bone Springs, Wolfcamp, Pennsylvanian, Barnett and Woodford. Alpine High has a large inventory of repeatable high value drilling locations; with thousands of low-risk locations in the Woodford and Barnett the company has access to significant number of oil prone locations.

Pioneer Natural Resources

The company primarily operates in the Spraberry and Wolfcamp shale of the Permian Basin and over a period of decades they have acquired 785,000 acres in the region through acquisitions, mergers and explorations.

The company’s growth is driven by the Spraberry and Wolfcamp horizontal program with a focus in both the northern and southern acreage of the region. The company produced 179 MBOEPD in third-quarter 2016 and estimates to increase the number to 188 MBOEPD by fourth-quarter 2016.

Based on the huge availability and production capacity of the region, Pioneer also estimates to increase its production by 30% to 34% and add 260 wells in fiscal 2017. Moreover, with significant decline of around 25% in its drilling cost since first-quarter 2015, the company would have the advantage of rapid margin expansion as well.

Conclusion

Permian Basin as discussed is the richest resource play in the U.S., and eventually the assets will become expensive due to the huge demand. Also, since the region has low exploration and drilling costs along with the availability of cheap and skilled labor, it has become a favorite of most of the oil and exploration companies.

However last year saw many acquisitions in the play and based on increasing demand, the asset has become overpriced. In order to tap the thick stack of oil-soaked layers explorers have even paid $60,000 an acre which is about 50 times what the deal prices were four years back.

This is a huge amount. Although the asset is very futile, explorers would get a better deal in a price lesser than this. Companies that are efficiently operating in the region are in a position to take full advantage of their resources whereas new acquisitions would not be a very sensible deal.

Disclosure: No positions in the stocks discussed.

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About the author:

Subia Khan
A value investor with more than 5 years of experience in the finance industry

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