Five Oil Producers Thriving In The Booming Permian Basin
Zacks Investment Research | Sep 28, 2017 08:15AM ET
One thing the oil market downturn has taught investors: nobody has much visibility into the future. So, when you think of something as a clear line of sight one quarter, it can soon be overshadowed by an unforeseen event.
To sum up, even as crude prices continue to make their way up, world oil supply remains in a glut and is likely to remain so through 2017. This might make any oil price strength short-lived.
Regardless of the commodity’s price movement though, one oil-producing region that continues to attract investors is the low-cost Permian Basin spread over west Texas and New Mexico. According to some estimates, the region – that has been churning out crude continuously for nearly 100 years – has produced in excess of 30 billion barrels of oil since output began in 1921. Incredibly, despite that impressive output history, analysts maintain that its best days are yet to come. In fact, Permian Basin is key to the studies that say the United States has now overtaken industry giants Saudi Arabia and Russia in recoverable oil reserves.
Permian Basin: A Hot Area for Producers
A sedimentary basin lying underneath the western part of Texas and the south-eastern part of New Mexico, the Permian Basin Shale covers roughly 75,000 square miles, almost half the size of California.
Experts say that it’s cheaper to drill and complete oil wells in the Permian Basin, as compared to most other major fields. Moreover, there are certain parts of the shale play whose well-returns are the best in the U.S. With crude prices still down significantly from their 2014 levels, well returns have become a very important metric to gauge profitability.
Permian’s attractive economics means that producers can still make money there at the current, $50-a-barrel price. This is mainly because of the region's extensive pipeline infrastructure, plentiful labor and supplies, and relatively warm winters that makes year-round work possible. Most other domestic share regions need prices above $60 to support new developments and expansions.
As a result, the Permian currently constitutes the lion’s share of the industry's recovery. In 2016, more than a third of the total amount spent on all U.S. deals was spent on Permian land purchases and leases. No other major oil region in the country came close to this activity.
Permian Deals Galore
In January, ExxonMobil Corp. (NYSE:XOM) announced its intention to more than double its Permian Basin resource of 6 billion barrels of oil equivalent. The company aims to achieve this through the buyout of companies owned by the Bass family of Fort Worth, TX. Alongside an upfront payment of $5.6 billion, ExxonMobil will make a series of additional contingent cash payments of up to $1 billion. (Read: Zacks Investment Research
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