The Permian basin, that straddles west Texas and southeast New Mexico, is currently the biggest shale oil producing region in the USA. However now, thanks to ramped-up activity by drillers, the Permian’s global status could soon have it join the ranks of Russia and Saudi Arabia as one of the Top 3 regions oil producing regions in the world.
According to a recent estimate from IHS Markit, output from the Permian is forecast to more than double between 2017 and 2023—taking the region’s production up to 5.4 million barrels per day (bpd). To get there, the region’s going to need a steady effort and savvy development from Permian players large and small.
Today’s production levels hover around 3.2 million bpd, which is expanding thanks to efforts from companies that include ConocoPhillips (NYSE: COP), Lilis Energy, Inc. (NYSE: LLEX), Occidental Petroleum Corporation (NYSE: OXY), Ring Energy (NYSE: REI), and Permex Petroleum Corporation (CSE: OIL).
The economic impact of the current boom is enormous. In the state of Texas, sales and severance taxes obtained from the Permian basin’s production alone accounted for more than $4.35 billion in state revenues.
Not everything is going perfectly, however, as pipeline bottlenecks certainly are a problem. Already, majors such as ConocoPhillips are temporarily pulling back on Permian drilling and completions as they wait for new pipeline infrastructure to catch up. It is worth to note, majority if not all of the bottlenecks occur in the main artery pipelines such as the Permian Express; the smaller to intermediate producers are not impacted.
Whereas other majors, like Occidental Petroleum continue to seek production boosts, such as through their partnership on specific projects with small cap Permex Petroleum—a relative newcomer that has stealthily accumulated a very respectable 6,500 acres of oil and gas holdings in the Permian Basin of west Texas and Delaware Basin of southeast New Mexico, with plenty of opportunity to economically and steadily increase production.
The pieces are all in place for US oil production to comfortably continue its strong growth over the next few years. Pipeline capacity issues aside, Permian production is set to grow over the next few years during a boom period that hasn’t been seen in decades. As pro-business as the region is, new pipelines are already approved to be implemented by 2020 which is expected to remove the bottleneck completely.
PERMIAN PRODUCTION MOVERS
ConocoPhillips (NYSE: COP)
Conoco CEO Ryan Lance recently made it clear to Financial Times that his company’s June announcement that it would redeploy its resources out of the Permian Basin, would only be temporary. Citing pipeline constraints that Conoco foresaw coming next year, Lance admitted that the constraints had arrived ahead of schedule. As the company works diligently to secure space on pipelines as available to carry its oil, in the short term, Conoco will temporarily slow its drilling and completion activities in the Permian. As soon as new pipelines are built, expect Conoco to ramp its Permian footprint right back up again.
Lilis Energy, Inc. (NYSE: LLEX)
Mid cap Lilis Energy recently moved its headquarters to Houston in June, just three years after it was teetering on the edge of bankruptcy and based out of Denver. The company avoided bankruptcy, sold its Colorado holdings, and shifted its focus to the Permian Basin, buying up acreage at low prices during the energy bust that was scaring off most investors at the time. Today, the company is considered by analysts to be one of the best-positioned small players in the booming West Texas oil field, with the ability to increase its production as quickly as crude prices rise. Now valued at over $330 million, Lilis is gearing up to make the leap into billion-dollar-plus stratosphere. The company recently made a move to swap its non-operated holdings with 1,500 acres of West Texas land in the Delaware Basin, further upgrading its Permian portfolio.
Occidental Petroleum Corporation (NYSE: OXY)
Long has Occidental been a major presence in the Permian Basin, going back to 2000 when it acquired then Texas’ largest oil and gas producer, Altura Energy. Today, with about 2.5 million net acres in the prolific shale play, Occidental is built upon a Permian-based foundation. Best known for enhanced oil recovery, Oxy has made improving production in the Permian somewhat of an art form. Just last year, Oxy paid $600 million to acquire more wells from Hess Corp. in the Permian, and recently partnered with small cap Permex Petroleum possibly giving an opportunity to pass the torch of knowledge. The region has been so good to the company that it moved its headquarters from Los Angeles to Houston in 2014.
Ring Energy (NYSE: REI)
Permian producer Ring Energy closed out 2017 having drilled 19 new horizontal San Andres wells, while in the process of drilling number 20 at the end of Q4 2017. Having recently announced an increase of $115 million in the company’s senior secured credit facility, Ring Energy is preparing to acquire more Permian opportunities, while also increasing activities within their horizontal drilling and development program. With the increase, Ring now has access to $175 million through its senior secured credit facility, up from $60 million. Earlier this year, the company boasted in its first quarter results, that it had raised its Permian output 91% year over year.
Permex Petroleum Corporation (CSE: OIL)
During the most recent cool period in oil prices, management at Permex along with their team of Texas & New Mexico oil and gas attorneys, and petroleum landmen quietly accumulated a very respectable land base in the Permian Basin for pennies on the dollar. Targeting divesting companies that were deep in debt, or close to going bust, Permex managed to put together a series of assets across 6,500 acres of Permian acreage, with several wells that were prime for re-entry, stimulation, and other forms of enhanced oil recovery. Along the way, the junior producer caught the attention of major Occidental, and inked a WI partnership deal. Now the company is set on prudently increasing production, and breaking its strategy into two key phases.
GROWING OUT THE PERMIAN PRUDENTLY
Timing was everything for Permex Petroleum Corporation (CSE: OIL), as it quietly acquired its Permian assets across the basin in west Texas and New Mexico. However it almost acquired these assets too quietly, as the market has yet to respond to their accumulation of 6,500 acres, with approximately 9 million barrels in 2P reserves.
To put that in perspective, those reserves alone as they are total a valuation of approximately $150 million—whereas the company’s market cap currently sits at just over 10% of that value.
The increase in the company’s reserves came with the latest acquisition of the ODC San Andres and Taylor properties in Gaines County Texas. In total, the acquisitions raised the company’s 2P reserves by 25.6%, and ultimately their Net Present Value of Future Net Revenue by 30.4%.
But possibly most importantly, the deal further expanded Permex’s operational footprint in the region, and sparked a working interest partnership on the field with Occidental Petroleum Corporation.
Now going forward, Permex can retain its position without the threat of being outspent by a partner with much bigger pockets, as well as learning from one of the best enhanced oil recovery teams on the planet.
Upon the announcement, Permex’s President & CEO Mehran Ehsan stated: "We are very pleased to complete this highly-anticipated acquisition integrating the ODC and Taylor leases into the long-term scale growth of the Company. This not only provides us access to work side by side with one of the world’s elite oil and gas operators, but will also allow us the potential for future synergies. This acquisition also comes at a time we feel crude oil is entering the next bull cycle.
Going forward, Permex has already begun its re-entry and stimulation program on shut-in wells to steadily increase production in a very economic fashion. As Ehsan has expressed, “Our approach is to target our lowest hanging fruit to increase production.”
In this, Permex’s Phase One of its strategy, the company will cheaply and swiftly begin adding significant barrels on the lowest risk assets, before building up towards Phase Two. The second phase entails more of the higher-risk, high-reward plays, such as horizontal wells that are more in the range of $4-5 million per well and expected to give significant scale to the company. In the meantime, the company can safely get its barrels per day up, while absorbing knowledge of the terrain for bigger drilling operations from its partners at Oxy.
Much like its midcap predecessors Lilis Energy, Permex has found a formula for success through the Permian. Built upon a solid land portfolio, with hundreds of potential drill locations, it appears that Permex is primed to grow along with its region of choice, as the Permian closes in on Russia and Saudi Arabia in the top three producing regions in the world.
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