As I look out the window at a bluebird sky in Midland, I breathe a satisfied sigh of relief that October has passed as I participated in four conferences: NMOGA in Santa Fe, the Executive Oil Conference in Midland, Pine Brook Road Partners’ Annual Investor Conference in New York, and the Permian Basin Petroleum Association (PBPA) Annual Meeting. The common theme among all of the well-attended conferences is that the participants, including oilmen and women from New Mexico to Houston, investors from both coasts, and journalists from as far away as the UK, was that the Permian Basin is the place to be if you are in the oil business. This fall we have had no less than 20 political candidates visit Midland-Odessa from out of town. Politicians from Austin, Santa Fe, Washington DC, and even Alaska have sojourned to Midland-Odessa to learn about the economic engine of the nation, and to bolster their campaign war chests in an increasingly expensive battle to stay in office or advance to a higher position.
Folks, what was once the quiet retirement choice for worn-out geologists, landmen, and engineers like me is now the incubator for ambitious young professionals in the usual trades as well as lawyers, finance jocks, and promoters to learn a trade, provide for their growing families, and make a fortune. It is heartening to see bright, motivated young people entering our business who will be and in many cases are capable of taking the baton from us and extending what we started. I am very impressed with the young professionals with whom I’ve worked at Legacy Reserves, Concho Resources, Elevation Resources, and our peers in the business.
While in New York, I served on a panel of portfolio company executives backed by Pine Brook Road Partners, Elevation’s primary equity sponsor. The room contained representatives of endowments, pensions, and institutions with over $2 trillion under management. Most of the money managers reside on the East or West Coast, whichironically coincides with the location of the activists that seek to impede our development of hydrocarbons. Our common theme on the panel of oil industry veterans was that the impediments to our success are growing, not easing. These impediments include infrastructure, people, and regulatory and legislative friction. Friction is exemplified by our executive branch’s willingness to embrace “sue and settle” tactics with activists to create regulations and outcomes that bypass the codified legislative, judicial, and regulatory processes. Our panel did its best to dampen the notion that every investment in the oil business is going to generate good returns: there are always winners and losers, and timing, and some would say luck, matters.
We have operators that talk about their “target” or “manufactured” well costs, but I can think of only a few operators in the Permian Basin that have approached the manufacturing stage and have achieved their “target” well costs. As Tim Dove, president and COO of Pioneer Natural Resources, put it during our annual meeting, the Permian Basin horizontal development is “still in the batting cage prior to the opening pitch of the game.” We can only hope that we are playing for the Boston Red Sox. We operators aspire for 30%+ rates of return on our drilling projects, but when leasing costs are baked in along with the frequent cost overruns on mechanically challenging projects, the average well drilled in the Permian does not yet reach the target returns.
All three seasoned and articulate leaders on the PBPA CEO Panel, Tim Leach of Concho, Randy Foutch of Laredo, and Tim Dove of Pioneer, agree that the Permian Basin is the best place to drill for and produce oil and that we will be drilling the 3,000’+ thick section of oil- and gas-bearing formations for decades to come. And because of the Permian’s scale and capital requirements, there is room for all of us to participate. It remains to be seen who the ultimate winners will be, but it should be a crowded field given the amount of available capital coupled with the depth and breadth of opportunities. It’s going to take a lot of capital (think trillions of dollars), a lot of attention to the regulatory and legislative process and compliance therewith (threats), and such a long time for development that we must hire and train our replacements now to get the job done next year and 30 years from now. Please consider getting your children in the business.
Thank you for your continued interest in staying informed and for your support of the PBPA, which was evident by the record turnout at the PBPA Annual Meeting on October 23-24. Those of you who attended the meeting were rewarded with rich content and interaction with the leaders of our industry and government. For those who missed it: there is always next year. You know how the St. Louis Cardinals feel.