Oil Barons Find Narnia in West Texas
News Article Sponsored by Bay Area General Crane Service
Written by: Liam Denning
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If you happen to find a battered, exhausted oil baron slumped in a dark corner (and who doesn’t from time to time?), just whisper this one word in their ear to revive them:
This shale basin, which stretches across northwestern Texas and into a portion of New Mexico, is rapidly becoming a Narnia-like place for the exploration and production sector. There, profits can still be made and growth can be had. For an industry savaged by job losses and bankruptcies, that sort of escapism is a good thing. Until, of course, it becomes a bad thing.
Blackstone is offering the latest affirmation of the Permian’s attractions where it counts: money. The private equity firm is deploying more than $1 billion in partnerships to buy up land in this shale sweet spot. Earlier in the week, PDC Energy paid $1.5 billion for two E&P companies with Permian acreage. More money has changed hands buying and selling Permian assets this year than in the all the other major U.S. shale basins combined.
Shale Not Be Moved
It isn’t that oil companies have simply ignored the dismal numbers on the Nymex: The rig count in the Permian has fallen by roughly half since spring of last year, according Rystad Energy data. But the other two basins have fared even worse, down about 80 percent. And higher productivity has cut the number of new wells needed to keep Permian production flat.
Jogging To Stand Still
“More from less” is what Narnia looks like to cash-strapped E&P companies; hence the desire of many to establish or expand positions in the Permian.
Without wishing to sound like the White Witch, though, E&P companies, and investors, should temper their hopes around the Permian. It’s worth remembering that one reason you’re likely to find some oil barons cowering in the corner is because they lost their heads and went on a land grab during the good times, assuming every shale rock could be turned to gold (or profitable oil; same thing, really).
There are genuine productivity gains happening in the Permian that make its oil profitable at lower prices, therefore keeping supply resilient. For example, the length of lateral wells drilled there have simply gotten longer, from around 4,000 feet on average five years ago to about 7,000 feet in 2016, according to Bob Brackett at Sanford C. Bernstein.
The other factor here is high-grading. The Permian’s resilience shows some shale basins are better than others. Equally, some bits of a shale basin are better than others. So Blackstone’s investment, for example, is focused on the Delaware and Midland plays within the Permian basin, which happen to be the best. That’s an entirely rational thing to do, of course.
But another way of visualizing this is to imagine ever-decreasing circles. Companies, and capital, are migrating to the sweetest of the sweet spots to ride out what has become an extended slump in oil prices. Again, rational — but with the potential to become irrational.
Here’s a chart of an index I made on the Bloomberg terminal showing the stock-price performance of 14 E&P companies that are weighted significantly toward the Permian, versus the SPDR S&P Oil & Gas Exploration & Production ETF and the oil price. It starts at the end of July 2014, roughly when oil prices began to roll over.
Don’t Mess With Texas
Permian fever can also be seen in the primary market: Of the top 5 sellers of new shares in the E&P sector over the past 12 months, 4 have heavy exposure to the basin — though Devon has sold some assets there recently — according to data compiled by Bloomberg:
Of the top 5 E&P issuers of stock over the past year, only Southwestern doesn’t have a significant presence in the Permian