By February 1, 2017 Read More →

As oil recovers, U.S. firms descend on the Permian Basin in West Texas

Permian Basin

Business is booming in the Permian Basin as oil companies hustle to be involved in the epicenter for the US shale resurgence.  Diamondback Energy photo.

Cheaper to drill in the Permian Basin than other major US oil regions

By Ernest Scheyder

ODESSA, Texas, Feb 1 (Reuters) – In most U.S. shale oil regions, energy firms are making strategic but cautious bets as the price of oil holds above $50 a barrel.

Here in the Permian Basin of West Texas, the largest U.S. oil patch, the industry poured more than $28 billion into land acquisitions last year – more than triple what they spent in 2015.

Those deals set the stage for much larger investments needed to extract the oil from the ground – and they illustrate how the Permian Basin has become the epicenter for the U.S. shale resurgence after a historic oil price crash.

“We could easily see an extra 100 rigs out here in the Permian by June,” said Josh Clawson of Gesco, a Midland, Texas, electrical contractor for oil drilling rigs.

That doesn’t necessarily mean the investment blitz will extend to other U.S. oil regions. The industry’s focus on the Permian reflects the simple math of profitability and a complex set of geographic advantages and technological advances that make it cheaper to drill here than in other major U.S. oil regions.

Permian Basin producers make money at the current crude price of about $53 per barrel because of the region’s sprawling pipeline network, abundant labor and supplies, and warm winters that allow year-round work.

Most of America’s shale industry needs prices above $60 a barrel to justify new projects and expansion. Oil has not hit that price since June 2015.

So at least for now, the Permian accounts for a disproportionate share of the industry’s recovery. The amount spent on Permian land purchases and leases last year represented 39 per cent of all deals nationally and tripled the activity seen in any other major U.S. oil region.

Acquisitions in North Dakota’s Bakken shale fields, by comparison, accounted for 3 per cent of all deals.

Judging by the confident flow of capital into West Texas – a swagger bred in part by aggressive cost-cutting and innovation through the downturn – U.S. oil companies have retained their appetite for risk.

What remains to be seen, should per-barrel prices rise further, is whether companies continue to expand operations in the Permian as projects start to make more economic sense in other oil states including North Dakota, Colorado and Wyoming.


Oil companies started the new year with announcements of about $9 billion more in Permian land deals, including a $6.6 billion Exxon Mobil Corp buy that doubled its acreage in the basin.

Occidental Petroleum Corp, WPX Energy, Noble Energy Inc and RSP Permian Inc have also made major commitments to the region.

The companies that have sold or leased their holdings have typically been smaller, privately-held firms aiming to take advantage of the high land prices rather than invest the millions of dollars needed to pump the oil.

The demand for West Texas acreage has sent land prices soaring in the last two years. One deal in December 2016 priced out at more than $63,000 an acre, double the price paid in similar deal earlier that year.

Double Eagle Energy Permian LLC and its predecessor companies have made a fortune buying and selling Permian acreage starting in 2009.

But Double Eagle’s founders, who have snapped up 65,000 acres in the past two years, now plan to start drilling their holdings in addition to speculating on land values. The firm is preparing for an initial public offering with an expected valuation of $3 billion, according to a half dozen bankers who have examined its value.

“Activity breeds activity,” said John Sellers, co-founder of Double Eagle, of the surge here. “The Permian is a really great basin to be in.”

While land prices have risen fast, the cost of acreage still represents a small part of the profit equation. Most of the expense is tied to drilling and getting the oil to market.

Buyers of Permian acreage are moving quickly to tap their holdings. The number of rigs across the basin is up more than 28 per cent in the past year; oil job postings here have more than doubled from lows of last March; and sales tax receipts for the region starting rising in November after falling for two years.

Oil firms are pumping 2.2 million barrels per day (b/d) of crude from the Permian, about a quarter of U.S. output of 8.9 million b/d.


In Midland and nearby Odessa, centers for the West Texas industry, the buzz of economic growth has replaced the desolation of 2015 and early 2016.

Many storage yards are only half full – meaning more equipment is in the field.

Chevron Corp, which controls more than 1 million acres of Permian land, last year opened a new regional office in Midland. EOG Resources Inc and Occidental Petroleum Corp have office expansion plans of their own.

Concho Resources Inc, which is headquartered in Midland, has been renovating and expanding its downtown Midland offices and funding community projects, including a $400,000 makeover of a downtown park.

Permits for new home construction jumped 50 per cent in November, the latest period for which data are available. And dinner at Midland’s Texas Roadhouse Inc now requires a half-hour wait.

The job market has roared back.

“Everyone I know here is hiring,” said J. Ross Lacy, a Midland councilman.

The resurgence gained momentum last summer when industry veteran Mark Papa’s Silver Run Acquisition Corp bought Centennial Resource Development Inc, which controls premium acreage across the Permian.

Papa is considered one of the preeminent oil executives of his generation, and his move from retirement back into the oil patch was seen as a sign by many that the Permian was heating up again.

Two months later, Apache Corp said it had accumulated over 300,000 acres of Permian land over two years for less than $1,300 an acre.

“The Permian Basin represents the foundation of Apache’s North American growth strategy,” said Gary Clark, vice president of investor relations at Houston-based Apache.

Apache estimated the land had more than 3 billion barrels of oil, sparking speculation that the Permian holds far more oil than anyone had expected in a previously overlooked part of the basin.

Anadarko Petroleum Corp sold acreage in east Texas earlier this month for $2.3 billion as it looked to raise cash to develop the 600,000 acres of Permian land it controls.

The firm is relocating 200 employees and their families to Midland, a sign of faith in the region’s long-term prospects.


Many of recent Permian deals were paid for with cash from secondary stock offerings, an unusual step that investors typically dislike because it dilutes their stakes in companies. But in the Permian, it seems, investors see the payoff.

Companies turned to stock offerings for cash because debt markets were largely closed to oil producers during the two-year price downturn.

Diamondback Energy Inc paid more than $3 billion last year for Permian land in two separate transactions – deals financed through stock offerings. Diamondback executives said the deals were immediately profitable and should provide years of growth.

Executives at SM Energy Co and RSP Permian made similar comments in announcing their own deals late last year for $1.6 billion and $2.4 billion, respectively.

While shares of top Permian producers have risen in recent weeks, Wall Street’s appetite for stock is unsated.

West Texas oil giant Endeavor Energy Resources LP, one of the biggest private oil producers in the Permian, is considering taking advantage of that with an initial public offering to expand and pump more from the field, Chief Executive Chuck Moloy told Reuters.

Of the 44 analysts covering Pioneer Natural Resources Co – considered by many investors to be the top Permian producer – forty recommend buying it, according to Thomson Reuters data.

None recommend selling the stock.

Investors are seeing the same unique advantages that drew oil companies to wide-open spaces of West Texas.

“The industry is learning where the value really is,” said Chuck Meloy, chief executive of Endeavor.

“And that’s out here in the Permian.”

(Editing by Simon Webb)

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