Ugly Permian Oil Data

| About: The United (USO)

Summary

In this article, I decided to revisit oil production statistics for the Permian and use updated data to figure out what the future for the region holds.

What I found is that there's a chance that output in the region will be higher this year than last year and higher than I previously forecasted.

Depending on how you look at it, the data's not terrible by itself but it could certainly be a lot better.

Around a month ago, I published an article on Seeking Alpha where I looked at the oil production trends of the Permian Basin, one of the largest oil and natural gas producing regions covered by the EIA (Energy Information Administration) in its monthly Drilling Productivity Report (the largest for oil to be specific). After seeing fresh data come out regarding the region, I figured it would be a wise idea to revisit the picture and see what the data is saying for investors in companies like Memorial Production Partners (NASDAQ:MEMP), Approach Resources (NASDAQ:AREX), and Legacy Reserves (NASDAQ:LGCY), as well as for the United States Oil ETF (NYSEARCA:USO) and other oil-related ETFs moving forward.

Looking back at the past

In my last piece on the topic, I had to make three core assumptions regarding the Permian. One of these related to the rig count in the region. Previously, I had forecasted that the rig count would remain unchanged in the area at 196 units, but we seem to have an issue at hand. In its report on the issue, the EIA now says the count has been revised down to 187 units, which is bullish for long-term investors but Baker Hughes (NYSE:BHI) says the number is now up to 202 units. Though my analysis is based on the EIA's numbers, I decided to err on the side of caution and use the more liberal Baker Hughes estimate, but I will keep the rig count unchanged here for the time being until we have more clarity.

The second indicator I had to make an assumption about relates to the month-to-month drilling productivity improvement rates in the region. In my last article, I acknowledged a sharp drop in the improvement rate but kept my own forecast higher (but still revised down) at 1.5% each month. Now, however, as you can see in the graph below, the improvement rate is closer to 0.75% each month so, with this in mind, I've decided to lower my own number down to that moving forward.

Click to enlarge

*Source: Created by Author with Data from the EIA's Drilling Productivity Report

The final indicator I looked at in my last article was the decline rate in the Permian. In it, I looked at three scenarios; a conservative one where the decline rate would average 3% per month, a moderate one where the number would be 4.1%, and a liberal one where it would average 5.2% per month. In the graph below, however, you can see that this data has changed and the average decline rate is now just under 4%. Because of this, I intend to keep the conservative scenario unchanged while moving the moderate down to 4% and the liberal one down to 5%.

Click to enlarge

*Source: Created by Author with Data from the EIA's Drilling Productivity Report

Incorporating my prior work into my model, I was able to create the following table below. In it, you can see that if the EIA's numbers are correct, and if my own forecast is accurate, oil production could be as low as 1,984,558 barrels per day in December of this year, but this is materially higher than the 1,851,195 barrels per day the organization estimated for December of 2015. Under the moderate (and most likely) scenario, output would have risen to 2,047,210 barrels per day while under the conservative one we could expect output of as much as 2,111,264 barrels per day, which looks quite ugly.

Click to enlarge

*Source: Created by Author with Data from the EIA's Drilling Productivity Report

The picture worsened... a little bit

Now that I've incorporated the new data into my model, I was able to create three new scenarios, shown in the table below, which illustrate what kind of year-over-year production investors should anticipate from the Permian in December of this year. Under the liberal model, we can expect oil production to rise to 2,002,966 barrels per day while under the moderate one it could increase to 2,060,102 barrels per day. Meanwhile, the conservative scenario shows output climbing to as much as 2,118,398 barrels per day in December of this year.

Click to enlarge

*Source: Created by Author with Data from the EIA's Drilling Productivity Report

In an attempt to put this all into perspective, I created the following table below, which shows my current forecasts compared to the ones I made in my previous report. Based on the changes I made, output should be higher in the Permian by between 7,134 barrels per day and 18,408 barrels per day on a year-over-year basis, with the moderate scenario showing an increase of 12,892 barrels per day. Though this looks bad, when you factor in changes made by the EIA for prior months and average them throughout the year, output this year could actually rise by just 641 barrels per day under the conservative scenario while rising by just 1,612 barrels per day under the moderate one. Even under the liberal scenario, the rise would come out to just 2,557 barrels per day, which is a rounding error in my opinion.

Click to enlarge

*Source: Created by Author with Data from the EIA's Drilling Productivity Report

Takeaway

Based on the data provided, it's clear the picture (if we use the Baker Hughes rig count data) for the Permian has worsened compared to what I anticipated last month, but when you consider that the average output increase isn't really material (though the year-over-year increase may be), it's hard to take the data in too much of a negative light. Beyond any doubt, it's better to see the picture improve than worsen, but I'm hoping (and will soon find out) that the picture is better in the other regions to offset these small changes in the Permian.

Disclosure: I am/we are long AREX, MEMP, LGCY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own LGCYO, not LGCY