Big is back, and the business done by the Bigs is brisk in the Permian Basin. We tap the minds of three top industry observers to explore why bigness makes bank in the region’s convention-defying recovery.
By Jesse Mullins
It’s been a much-cited statistic. Land deals in the Permian Basin these days have gone for as much as $60,000 per acre, and even more—a price that Wood MacKenzie has said is 50 times higher than four years ago. And it’s ten times higher than the rate in the Bakken today.
This is life in the new Basin. While some may have expected merely a resumption of business-as-usual following the bust of 2014-15 (and some of 2016), such has not been the case. The Permian’s profile has done nothing but soar during these years of downturn.
And now, with the too-long-awaited recovery under way, the transactions are higher, the moves are more pronounced, the technology is ever more sophisticated, and the stakes are bigger than ever.
In a way, things have come full cycle—and we are talking a decades-long cycle. The major oil companies are back. They departed the Basin over a long stretch of years in the late 20th Century, headed offshore or overseas for fresher oilfield projects and bigger playing fields. The shale revolution that has been wrought in (mainly) Texas and New Mexico has fetched them back. Exxon-Mobil, Chevron, Occidental, Shell, and other titans of the industry are now treating the Permian Basin as one of their highest priorities, if not their highest. The old way of things is re-asserting itself. Big plays attract biggest players. And the Permian is becoming (if it isn’t already) the biggest play of them all. Some industry observers are saying that within ten years it could surpass the colossal Ghawar field in Saudi Arabia for sheer output.
That has changed the way business is done.
PB Oil and Gas Magazine spoke with three energy-minded executives who make it their livelihood to follow the latest developments in the Permian and other markets. We asked them what is changing here—and why.
James Wicklund, who is known to many members of the Permian Basin Petroleum Association after his well-received PBPA luncheon talk back in September in Midland, pointed to the vast upside that the Basin now represents.
“First of all, the Permian Basin at the end of the year was producing about two million barrels a day,” began Wicklund, who is based in Houston and is managing director of Credit Suisse LLC. “There are estimates that it could go as high as ten million barrels a day. Can you imagine how many more people, houses, restaurants, banks—you name it—there has to be? So, this is a growth opportunity.
“Up through ’14, Midland was kind of the gold rush mentality. But this is a much more sustained basis this time, because instead of having small companies come in and see what they can find, now you’ve got Exxon and Chevron and Conoco coming in and setting up long-term, big-base operations. So you’re going to have Midland-Odessa be one of the biggest growth areas in the country for the next several years.”
Acknowledging that things have gotten more global, where the Permian Basin’s importance is concerned, Wicklund said that Permian is the most important oil basin in the world. “It [the Basin] is what’s making the United States a swing producer. It’s always been a global business, but up until four years ago we could drill for and produce all the oil we wanted in the United States and it really didn’t move the global needle. But when we discovered the [new shale prospects in the] Eagle Ford and the Bakken and now especially the Permian, it’s become the most important. So the global business—the world’s oil business—is currently basically headquartered in Midland.”
This intensified interest in Permian performance has upped the ante, where the bigger players are concerned, thus prompting the vastly higher outlays for leaseholds.
Asked about those high-five-figure prices for land, Wicklund quoted another source.
“Mark Papas at Centennial did a really good job of explaining that,” Wicklund said. “Because there is so much oil underneath one square mile of Permian than there is under one square mile of anyplace else—[this is] the stacked pay argument that we’ve heard about for years in the Permian—well, his argument is that you can spend up to $250,000 an acre and still generate a return.
“And so the potential, the potential with today’s technology is just staggering, and that’s what driving these $60,000-an-acre deals.”
Elsewhere, Gary Sernovitz (based in New York), offered some thoughts on the tremendous surge in Permian activity.
“The strange thing about the downturn of 2014-15—years which brought just real carnage in a lot of places—was that the Permian Basin during that period became undisputedly the most attractive basin that there is in the world,” said Sernovitz, who is managing director at Lime Rock Partners, a creative private equity investment partner focused solely on the upstream oil and gas sector. “You saw that [reflected] also in the stocks of Permian-based producers during the downturn, where they pretty much held value while everything else was declining pretty precipitously. And so it was definitely a strange market where amidst despair you had one area of exuberance. But a few things have happened over that period, one being that, geologically speaking, there has been a tremendous de-risking of multiple zones. There’s also been a greater understanding of down spacing, and obviously bringing costs down.
A second development—this one among larger companies—has been that there has been a tremendous appetite for these assets. This is in two areas. One, companies that you would call Permian specialists already had, effectively, infinite access to capital to do acquisitions, so you saw the Diamondbacks and the Parsleys expand into the Delaware. You saw—almost weekly—large transactions of hundreds of millions of dollars if not billions.
So you saw the public markets funding the large independents, and then the second [area] is that two of the majors have made a case for the Permian, [putting it] front and center of their plans for production stability. That’s Exxon Mobil and Chevron. Exxon did that with an acquisition, on top of other things they’re doing. And then Chevron sort of, well, looked in the closet and found out that they had [laughs] a lot of Permian acreage. A lot of this land is—according to what I’ve heard from friends in Midland—is actually land that Getty Oil put together that was eventually owned by Texaco and then eventually by Chevron that clearly was not part of the Chevron-Texaco merger but is now [part of Chevron].
“Well, in the Delaware Basin, you have over 3,000, sometimes 4,000, feet of pay. You have the Wolfcamp. The Wolfcamp was, I think, conventionally thought of as the fourth-largest oilfield in the world. But the Wolfcamp, if you think of it as its own oilfield, will probably go down a decade from now as the largest oilfield in history. It’s clearly been producing for a century or more in some of the shallower zones, the shallower reservoirs. But there’s no question. Pioneer [Natural Resources] has talked about producing a million barrels a day. [Pioneer is a major player in the Wolfcamp.] With Chevron’s [output], and EOG, and others’, we’ll see huge numbers that will come to rival, probably the Gwahar field, which does produce five million barrels a day now, and has for 50 years.”
Sernovitz thinks the attraction to the Permian arises from its scarcity value—nothing else compares to it.
“It’s world class as a basin of scale. And it’s still relatively ‘new.’ I mean if you think about the Eagle Ford and the Bakken, they have been in full development mode for seven or eight years, but the Permian has been on the horizontal side for [significantly less time than that]. So what was [destined] to happen on the natural gas side is happening on the oil side, which is that the last shall be first. The last big basin discovered ended up being the biggest. As in the Marcellus being the last gas basin, [so it is that] the Permian was the last big oil basin—in the Delaware, that is.”
Meanwhile, yet one more phenomenon that is being played out is that the major oil companies simply do things differently. Furthermore, the major independents, which have been bigger and more sophisticated in recent years, behave somewhat more like the majors do.
“There is kind of a natural sociological trend of things moving from the charismatic phase to the bureaucratic phase,” Sernovitz said. This is a phenomenon he discussed in his insightful 2016 book, The Green and the Black, which this magazine reviewed here. “There are still opportunities for smaller younger companies, but there’s a lot of the activity’s going to be big companies with 25-30-rig kind of development with integrated water like Pioneer’s doing. Just really bringing a lot of capital and a lot of efficiencies to the process.”
Dallas-based Paul Puri, managing partner at Capital Alliance Corporation, takes a decidedly markets-based view of things in his analysis. Capital Alliance, a private investment banking firm, provides financial consulting service for mergers and acquisitions. Puri specializes in oil and gas deals. Like the other two sources quoted here, he sees a massive shift taking place.
“When Big Oil makes a move like they have here with Exxon, with Chevron, with Shell, they certainly bring more to the table,” Puri said. “They bring a strong balance sheet, they have a history of funding a lot of growth—frankly some of the projections show them doing 30, 40 percent growth a year, that they can easily put into the shale. They have a price per well in the Permian, at $5-6 million, that is [dramatically different from] the $100 million, plus or minus, that they put into deepwater-type projects. So they bring a heck of a lot of capitalization and frankly a destabilizing force, if you look at it from a small company perspective. Big Oil’s abilities to ramp up production, ramp up volumes, without having to go to the public markets in a big way, as the smaller companies do, can really put some of the smaller companies at a competitive disadvantage. Time to delivery, ability to put product out there into the global marketplace, ability to meet commitments and deadlines and shareholder-type upside surprises—and to do this at the $50 or $55 range [per barrel] that oil is at today—this is something they [major oil companies] can withstand without having to worry about the things that small companies have to worry about in terms of constant hedging and the ability to lock in prices and be disciplined about them. And about questions of when to get in and when to get out.”
Puri said that much of what has happened with land purchase prices out in West Texas has come from productivity increases and efficiencies—and from the ability to continue operating profitably there, as contrasted with the circumstances in many of the other shale geographies in North America.
“All of this has brought just a wealth of demand to buy-in, to acquire positions. This has put a ‘put option’ on the value of Permian property. Certainly, smaller companies feel the need to continue to find exit positions, given that they can’t ramp up the production fast enough, or as fast as these big companies can. The big companies are paying premiums to be in there, but they also have a built-in cost position. They can continue to operate out there very profitably. We don’t see any reverse/fall in pricing for land positions. It’s certainly in high demand at this point.”
The move toward a more global marketplace for U.S. oil and gas is also a trend that favors the majors.
“It’s exactly where the bigs have access on so many fronts—with the global markets,” Puri said. “They certainly have access to resources, they have access to infrastructure, of course, with their global operations, their ability to handle product, to move product, and not to be at the mercy of raising funds and high storage positions, or landlocked positions, they certainly control the ability to meet deadlines and to meet deliverables from global users’ fuel [requirements]. So they are best positioned to capitalize on moving the substantial amount of product they’re going to be bringing up over the next three years to global markets much quicker, easier, and profitably than smaller companies—companies that really don’t have access to, or control of, distribution points as easily.
Still, global demand can be the limiting factor in that scenario, as Puri noted.
“Global demand takes years to ramp up. Global supply is really on the margin here. That tends to move very quickly, if it grows. For example, take Exxon and Chevron. They put a two, three year capex in the Permian, where we’re already pulling two million barrels a day out of the ground. They’re easily forecasting pulling up an additional million or two [barrels per day] just out there in the shale positions they’re taking. So automatically they could flood the market there.”
“If I’m going to be drilling a huge number of wells in a large, contiguous area, well, it’s very different from the old days. In the old days, I might drill a well, produce it, and go on. But these big oil companies, with their big contiguous-acre positions, are virtually building towns, with water supply, electricity, pipelines to bring in the water, pipelines to take away waste water and oil, and gathering systems for the oil and gas. So the infrastructure is huge compared to the old days when we just drilled one-off wells, and when that well was depleted we moved on. So all these things, they all lend themselves to bigger companies.”
The big-little tension extends to more than just the E&P side. The service sector has seen a renewed emphasis on size as well. Wicklund commented on the fact that not only are leaseholds so much bigger than in the previous years, but the amounts that the lessors are paying for them are astronomical.
“And that causes you to ensure against the cost of failure,” Wicklund said. “If I spend, for instance, a million dollars, I’ll take risks. If I spend $100 million dollars, I don’t want to take risks. So, the cost of this acreage causes the E&P companies to try to ensure against the cost of failure by hiring bigger and better [service] companies. There’s the argument of scale—the Schlumbergers and Halliburtons of the world are able to provide a broader range of equipment. And there’s also the safety issue, because I have Chevron and Exxon and those type companies involved now, and their safety programs and requirements are much more difficult for small companies to meet.
“But then there’s the underlying cost of failure. If I hire Jim Bob Wicklund Service Company and something goes wrong and I sue him, he hasn’t got any money. So, there’s a whole lot of factors that are making size matter.”
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