Digging into the DUG

The 2018 DUG Permian Conference delivered a primer on what it takes to be successful in the Basin.

FORT WORTH, TEXAS—The DUG Permian Conference, an annual event, fetched top Basin executives and other decision makers to this fine city for what turned out to be an eye-opening exploration of the fast-changing landscape that is the Permian Basin, the most important energy basin in North America and arguably the world. Hart Energy Conferences produced the event, which was held at the Fort Worth Convention Center.

By Jesse Mullins

The conference ran two and a half days, but with the first half day given over to an afternoon minerals workshop that was attended mainly by early arrivals, the main, fully attended sessions of the conference were confined to two days, May 22 and 23.

Individual speakers and panel sessions were run almost continually. What follows will be highlights from just a partial representation of the numerous voices who shared their insights. Further, this report is the first of what will be a two-parter. We concentrate here on just reports shared on May 22, and next month we will conclude with key points from the last day of the conference, May 22.

Tuesday began with an opening keynote address from Clay Gaspar, president and COO of WPX Energy. Gaspar spoke on “Getting It Done in the Delaware.” As the event’s program noted, WPX has, since its 2015 entry, “grown Delaware production to more than 58,000 boe/d—more than twice that of a year earlier. First-90-day production from five Lindsay 10-15 pad wells was 576,000 bbl of oil.” Gaspar outlined WPX’s approach to making its zones pay. We share an accompanying slide from his presentation to show WPX’s strategic position in the heart of the hottest sub-basin in the Permian. (See, “WPX Acreage in the Heart of the Delaware.”)

Gaspar was followed by a Deal-Making Panel, “Money and M&A,” which featured guests Bill Marko and Mark Sooby. Marko is Managing Director of Jefferies LLC and Sooby is Managing Director of Deutsche Bank.

Marko shared what he called “Five Permian Oil Growth Themes”:

* Tier 1 Permian development areas will drive the majority of oil production growth in the United States for the foreseeable future.

* Last 5 years of industry has seen tremendous growth of Tier 1 Permian inventory while rest of Tier 1 inventory has seen inconsistent growth.

* Jefferies estimates a minimum of 400,000+ Tier 1 Permian development locations with other resource plays adding 40,000+ additional locations.

* 50+ years to exhaustTier 1 inventory based on current rigs running.

* Unfettered by takeaway constraints, Permian could deliver 10 MM Bopd and 30 Bcfd by 2028.

Said Marko: “Over the last five years, the Permian has led the way in growth in the United States, which translates to growth worldwide. I think it was because of the Permian that OPEC had a lot different outcome to their plan to put the United States at its knees, and to hurt the United States as a competitor. In fact, it made us stronger, which was really fascinating.”

As noted above, Marko said that on the upstream side—if there were such a thing as unfettered takeaway, “which we don’t have”—the Permian could deliver 10 million barrels a day [eventually] and 30 BCF of natural gas [eventually] a day. “We’ll see what happens and we’ll see what percentage of that we get as we go along,” he said. “The Permian’s going to be important for worldwide oil supply. Eighty percent or more of the drilling locations in the United States are in the Permian.

The production figures, as Marko noted, are phenomenal. “It’s amazing, and this is because of longer laterals, denser completions, bigger completions, smarter completions. We’ve cut the costs a bit and we’ve doubled and tripled or quadrupled tight curves. This happened because of the price decline in 2014-2015 [during which] everybody had a third of the money [as compared to boom times] and they had to be smart about how they drilled. People took steps back. Instead of going fast and going for growth they shot for, ‘How do we spend our money as wisely as possible?’

“The United States is now the no. 1 hydrocarbon producer in the world,” he said, taking into account natural gas production along with oil production. “Where’s the growth coming from? The Permian is the monster. Maybe 52 to 100 thousand barrels a day per month of growth in the near-term future. Associated gas is a big deal as well. I think we’re at a 9 BCF a day [rate] or something like that from the Permian.”

Marko said that margins are what matter in the near term. “That’s going to go into people’s decision-making as they think about deals.”

“When people say, ‘Oh, somebody’s paying $50,000, $60,000, $70,000 per acre,’ here’s why.” [He points to a slide showing the stacked benches of producing zones in a Permian field.] “It’s all about the stack, the small ‘s’ stack [that is, not the Stack play in Oklahoma]. It’s the mile of hydrocarbons in place. That’s why people can afford to pay this. As technology improves, as the oil price firms up, this is going to come into everybody’s pockets.”

Marko described the current environment as “a really fascinating time.”

“We’re in just the first or second inning of technology improvements. Deal flow has been dead because of the reset where investors have insisted on returns rather than growth, which I think is a good thing for the industry. I think the investors and the industry have agreed, “Hey, we’re going to do that.” The people who have made acquisitions have big inventories, and until they burn off the inventories they’re not going to do any more acquisitions. It’s like, ‘Finish your plate. When you finish your plate, come back and you can have seconds.’ They want to see performance. ‘Tell me you’re going to hit the tight curves, tell me you’re going to run the rigs you said you’re going to run in your acquisition economics.’”

Valuations have changed over time in this shale boom, Marko said.

“In the early days, it was kind of based on dollar-per-acre. Then it morphed into being based on a development plan: ‘Tell me what the development plan is and I’ll forward lean and I’ll think the tight curves will improve, and capital cost will have a learning curve and we can grind that into the economics.’ Today it’s really about cash flow. ‘Tell me what the EBITDA is this year, and next year, and the forward years, and let’s look at multiples of that, let’s compare that to public valuations.’ That kind of forms the foundation for how things are valued. The point being, I think, is that as the shale renaissance has occurred, you need more and more proof positive of what you’re going to be able to do. That’s what the investors insist on, and that’s how people are valuing assets.

“I think we’re going to see the Permian, for as far out as we can see, be the premier basin in the world. It’s got the growth opportunity; it’s got the stack. There’s no place on earth that’s got the kind of hydrocarbons in place, as well as the application of technology and the infrastructure. I think it’s a great time for people to buy as much as you can of all the oil in place. I think people will be pleasantly surprised.”

Mark Sooby then took the podium and further fleshed out the “money and M&A” prospects.

“I think that optimism is the story of the day,” Sooby said. “The financial markets are there for the players across the spectrum in the Permian Basin, from small cap to large cap or major. I think that you’ll see the little green sprouts are coming up pretty strongly after a nasty downturn in oil prices. The Permian leads the way in industry recovery.

“My first slide here is a glimpse at the Permian Basin food chain. [See accompanying slide.] It looks a little predatory, but it actually isn’t that way at all,” he said. “The Concho-RSP transaction was quite a friendly transaction. I suppose I could have put puzzle pieces here because I think puzzle pieces are the bigger story in terms of M&A going forward. You expect to see the food chain playing out in a pretty big way. M&A will be active, that’s for sure.

“Capital is available up and down the risk spectrum,” Sooby added. “You can find that value has been created, ensuring access to capital, and that the current focus is shifting to execution. It puts a larger burden on the private equity companies as they execute their programs. I would say that in the hands of the largest companies that

economies of scale are achieved, that’s really going to be the direction that the assets flow and the capital flows.”

Sooby’s closing thoughts:

* The Permian is THE Basin for companies large and small.

* Capital is available up and down the risk spectrum.

* Value has been created, ensuring continued capital access.

* Current focus is shifting to execution from inventory accumulation.

Marathon’s Take

Todd Abbott, vice president, Resource Plays-South for Marathon Oil Corporation, was next up. Marathon is active in more basins than just the Permian, and its biggest move in the Permian is in the red-hot Delaware. Abbott discussed the company’s philosophies there.

“What we’re seeing is that success breeds success, and growth generates opportunities,” Abbott said. “I can’t talk about the Permian without at least addressing the infrastructure or capacity issues that we’re facing right now. I know it’s kind of on everyone’s mind. It is challenging. I’ll tell you that Marathon is benefiting from some Midland-Cushing basis swaps that we’ve entered into. We have about 10,000 barrels a day of open positions at less than a dollar to WTI. And that’ll go from the second half of ’18 through 2019. So for our production on the rest of the year, we’ll have about half of our Permian production hedged, about less than a dollar to WTI.

“And it’s important, too, to note when I talk about the infrastructure constraints in the Permian at Marathon, that currently—because this is a fairly new position for us—that the Permian production makes up only about 4 percent of Marathon’s total production,” he added. “So our exposure is a little bit limited for the time being. We don’t anticipate flow assurance issues, but we are planning for growth. We have extended our oil gathering agreements and added oil gathering agreements. We’re evaluating our gas gathering agreements and have team commitments for the longer term.

“Then, on the water side, which I know is a hot topic and will be for a long time here in the Permian, we’re moving the majority of our water production over to pipe which will greatly reduce our unit operating costs. And we’ll see that in the coming quarters.

“We expect the Permian Basin to follow the track record that the Bakken and the Eagle Ford did for Marathon—which is quickly advancing their execution, quickly learning from the data that they’re gathering, and then moving into the top of the Basin performance. I think we have a track record in doing that and you’ll see that in the Permian and also in the SCOOP/STACK.”

Strategic Building Blocks

During one of the afternoon sessions, Randy Foutch, founder, chairman, and CEO of Laredo, Inc., discussed what he termed “strategic building blocks for long-term success.” He cited three in particular: (1) proprietary data and analytics, (2) infrastructure, and (3) contiguous acreage positions. The data and analytics help one to arrive at an optimized development plan. The emphasis on infrastructure leads to lower costs. And the concentration on having a contiguous acreage position helps one achieve capital efficiency. He summarized thus: “A disciplined focus on key value drivers since inception has [helped Laredo] drive shareholder returns.”

Lance Robertson, who presented Tuesday’s Mid-afternoon Keynote, is chief operating officer and senior vice president of development for Endeavor Energy Resources.

Robertson was able to cite a major uptick for Endeavor, when discussing the E&P’s production. In 2016, Endeavor achieved a 90-day cumulative BOED of 6,655 per 1,000-foot lateral. That number went up to 8.403 BOED for 2017 (an increase of 26 percent). And it went up again in 2018, rising to 9,223 BOED, a further increase of 10 percent.

Posing the question, “What drives well performance?” Robertson offered four parameters.

First was a focus on key inputs, which he identified as “location in basin, landing points, and completion.” Where landing points are concerned, Robertson said that Endeavor was refining its target selection, transitioning to small target windows of about 15 feet for best stimulation initiation. Endeavor has continued to drive higher-density completions by employing narrow stage width and more clusters per stage. They have moved from 5 to 7 more clusters over the past year and are moving to test further increases in cluster density. They also are continuing to test proppant and water loading, horizontal and vertical spacing, and surfactants.

His “keys to success” were four: (1) continue to efficiently develop their large, premier lease position, (2) focus on further improvements in capital efficiency, (3) grow volumes and cash flow to support recycle of capital for large scale operations, and (4) relentless pursuit of lower cost.

Watch next month for more insights derived from this once-a-year event.