In the midst of an oil-price slump, one area in Texas is enjoying a bit of a boom

Published: Apr 7, 2017 7:24 a.m. ET

$17 billion of deals have taken place in the Permian Basin so far in 2017

MarketWatch photo illustration/Getty Images, iStockphoto

 

Oil markets may remain in the grip of a prolonged slump, yet one oil-and-gas producing area in the U.S. is at the center of a modern-day land grab that’s made it a bright spot for energy deals.

From energy giants such as Exxon Mobil Corp. XOM, -0.12%  to scrappier exploration and production outfits, companies have raced to the Permian Basin, an area roughly 250 miles wide by 300 miles long located mostly in West Texas.

Mergers and acquisitions involving the Permian are worth $17 billion so far this year, including corporate acquisitions and asset buys, according to IHS Markit. That compares with nearly $26 billion in the area’s transactions for all of 2016 and $11 billion in 2012.

 

Permian deals are worth 76% of the total value of oil and gas exploration deals in the U.S. in 2017; that share was 41% in 2016 and 13% in 2012

“The interest you see in the Permian is legitimate,” said Ganesh Jois, a fund manager with Goldman Sachs Asset Management’s energy and infrastructure team. “There’s no doubt that there’s tremendous resources there.”

The bigger question, however, is whether oil futures prices will cooperate, he said.

Most companies in the Permian forecast 15% to 20% production growth for this year, a pace that assumes oil futures prices around $50 to $55 a barrel. Prices below $45 a barrel, however, could crimp production.

As more companies move to the Permian, land prices have risen. According to IHS Markit, the average acre in the Permian sold for about $6,000 in 2012, while one acre sold for more than $29,000 last year and these days is worth some $22,000, although it is hard to speak of averages as prices vary according to underlying, potential value that the land is perceived to hold.

Early last year, one acre might have sold for $30,000 or $35,000; by the fall of 2016, one acre was going for about $45,000, GSAM’s Jois said. “In the past 15 months or so, we’ve seen a bit of a land grab.”

 

Even as prices drifted lower, interest in the Permian was sustained, which helped it gain its notoriety. That’s because the Permian benefits from being a long-established oil-producing region.

“It’s a mature region with a lot of infrastructure,” said Deborah Byers, a managing partner and U.S. oil and gas leader at consultancy EY, formerly Ernst & Young. “There’s 90 years of history there.”

A web of support

That precious infrastructure supports exploration and connects production to major markets, a web of support that newer oil plays may lack and one that keeps costs relatively low, keeping the Permian attractive amid lower futures prices.

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Oil majors mostly left the Permian and other inland U.S. areas two decades ago to pursue deepwater exploration off the Gulf of Mexico, leaving smaller independent companies to continue to coax oil and gas from the area.

New uses of technology, a better understanding of geology, and geopolitical forces have made the Permian a renewed success, and the majors are coming back.

Major deals in the Permian this year include Exxon’s $5.6 billion deal to buy companies owned by a prominent Fort Worth, Texas, family; Noble Energy Inc.’s NBL, +0.20%  $3.4 billion deal to buy assets and acres from Clayton Williams Energy, and Parsley Energy Inc. PE, -0.16%   $2.8 billion deal with Double Eagle Energy Inc. assets.

When oil prices are weaker, the Permian is one of the few places where it remains economical to drill, said Sven del Pozzo, an equity analyst with IHS Markit.

The path to understanding the Permian’s lasting allure amid oil prices’ wild ride in the past two and a half years starts at understanding its stacked “pay zones.”

A pay zone is a pocket that contains oil and gas that are economically and technically feasible to produce. In the Permian, there is no single pay zone, instead there are several, stacked like giant rock pancakes.

Embedded in those multilayered stacks, there’s “tight oil,” and extracting the oil and gas trapped in that geological quirk has become more economically feasible in the last few decades, with evolving strategies that combine horizontal drilling and hydraulic fracturing.

 

Horizontal drilling is particularly efficient in the Permian and other “tight oil” formations. That’s drilling a well sideways rather than straight down, and in the process exposing more oil-rich rock to the well bore than what would be exposed by drilling a conventional vertical well.

Opportunities in natural-gas processing

For an investor, Jois said he and his colleagues are more optimistic about infrastructure companies than producers. If the 15% to 20% growth that exploration and production companies are expecting comes to pass, it would bode well for the so-called “midstream” companies, such as pipeline operators and natural-gas liquids processors, he said.

In going for such companies, investors are not taking on direct oil-price risk, he said. For the Permian in particular, there’s a “fair amount” of natural gas that needs to be processed, stored, and transported, Jois said.

Gas processing may be the area that will experience the most growth in the Permian, as more oil-pipeline capacity is coming on line, he said.

Among large natural-gas midstream companies with a presence in the Permian are Energy Transfer Partners LPETP, +0.19% Enterprise Products Partners LP EPD, +0.16% and Targa Resources Corp. TRGP, +0.47%

Among companies with a large presence in the Permian that are often among Wall Street analyst picks are DiamondBack Energy Inc. FANG, -0.09% Concho Resources Inc. CXO, -0.02% and Pioneer Natural Resources Co.PXD, +0.27%

No one is sure how long the Permian boom might last.

New technology uses and efficiencies may encourage companies to revisit mature areas, such as deepwater Gulf of Mexico, which is already starting to happen, said EY’s Byers, who is based in Houston.

Major companies such as Royal Dutch Shell PLC. RDS.A, +0.60%  and Chevron Corp. CVX, -0.14%  bid heavily for Gulf of Mexico’s deepwater blocks in a government auction in late March.

For now, the interest in the Permian is a source of some amusement and surprise in Texas, she said.

“We’re like, ‘we’ve seen that rodeo before.’”

The iShares U.S. Energy exchange-traded fund IYE, -0.23%  has fallen 6.3% in the year so far, while the S&P 500SPX, -0.11%  has gained 5%.

 

 

http://www.marketwatch.com/story/in-the-midst-of-an-oil-price-slump-one-area-in-texas-is-enjoying-a-bit-of-a-boom-2017-04-07