Competitive Landscape In The Permian Basin

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Includes: APA, AREX, BP, CDEV, CHK, COP, CPE, CVX, CXO, DVN, EGN, EOG, FANG, HES, JAG, LLEX, OIL, OXY, PE, PXD, RDS.A, RDS.B, REN, RSPP, VNOM, XEC, XOM
by: Laurentian Research

Summary

We've compiled a list of mostly public companies that hold land positions in the Permian Basin.

The top ten acreage holders are Oxy, Chevron, Exxon Mobil, Apache, ConocoPhillips, Devon, Pioneer, Concho, EOG, and Cimarex.

Permian pure plays include Concho, Endeavor Energy Resources, Energen, Diamondback, Parsley, Approach, RSP Permian, Centennial, Jagged Peak, Callon, Viper Energy of Diamondback, Resolute, Lilis.

Hess only owns EOR assets in the basin, while Shell has stake in a JV with Anadarko as a result of buying Chesapeake Permian assets.

Legacy players in the basin shifted to unconventional plays, while 2017 see capital budget increases across board.

The Permian Basin (Fig. 1) as of 2016-2017 is to the oil industry as internet as in 1998 is to information technology. "The Permian Basin has now become the crown jewel of the world's oil and gas industry," said Scott Sheffield, Chairman of Pioneer Natural Resources (see here). The oil and gas industry invested over $28 billion into land acquisitions in the Permian Basin in 2016, more than tripling what was spent there in 2015 (see here).

The Permian Basin has been hot in the oil industry in the last couple of years while the industry was going through a rough patch (OIL), because its unique geological conditions in combination with available surface facilities make it possible for many operates to achieve breakeven at or even below $40/bbl of oil prices.

In this article, we analyze the competitive landscape as to unconventional petroleum development in the Permian Basin, hoping to identify potential research targets for further, in-depth investigations.

Our approach is to examine the land holding situation in the basin. There are 10 steps to unconventional oil and gas development, namely leasing and permitting; resource appraisal; asset development planning; project management; building the well pad; drilling the well; hydraulic fracturing; building or linking pipelines; producing; and lastly plugging and restoration. Land holding situation is just the result of the first step of a series of activities. However, it is arguably the most important step, because future well economics, reserve booking and production growth potential all depend on it. Therefore, an examination of acreage positions in the Permian Basin can hopefully shed important light on future change in valuation of the operators there.

Fig. 1. The Permian Basin and its tectonic setting, after Pioneer Natural Resources.

Acreage positions

By going through various media reports, and operator websites, news releases and financial filings, we managed to compile a list of public oil companies which hold land positions in the Permian Basin, complete with their respective net acreage, average daily production and inventories of identified drillable locations (Table 1). The list is incomplete, with the total net acreage in the list accounts for approximately 1/3 of the whole area of the basin partly because a lot of land held by private oil companies are not included (except for one, i.e., Endeavor Energy Resources LP). Even for public companies, we do not claim that this listing is exhaustive.

Table 1. List of major Permian Basin acreage holders, compiled based on company filings, releases and presentations. Diamondback net acreage as of Dec. 31, 2016, was 0.106 million acres; Marathon acreage is 2017 new acquisition; Callon acreage includes 2017 purchases.

Fig. 2. Acreage holdings in the Permian Basin, after Rystad.

The top ten land holders

The top ten participants in the Permian Basin are Oxy (OXY), Chevron (CVX), Exxon Mobil (XOM), Apache (APA), ConocoPhillips (COP), Devon (DVN), Pioneer (PXD), Concho (CXO), EOG (EOG), Cimarex (XEC). Not all of their acreages are for unconventional plays, e.g., half of Oxy acreage in the basin is actually for enhanced oil recovery, i.e., EOR, while only 12% of ConocoPhillips net acreage in the basin are for unconventional oil and gas (Fig. 2).

Oxy, Chevron, and ConocoPhillips are old-timers in the Permian Basin:

  • Oxy operates more CO2 floods than any other CO2 flood operators in the basin, but it also holds approximately 1.4 million unconventional net acres in the basin as at the end of 2016, targeting Wolfbone in the Delaware Basin as well as Wolfberry in the Midland Basin.
  • Chevron in the last few years has been pivoting toward unconventional plays in the Permian Basin, where it holds 2 million net acres, seeing that the era for multi-billion-dollar mega projects are gone (see here). "Some of the best things we have in our portfolio are the shales," Chevron CEO Watson said. "My employees in the Permian know I'm featuring it as something very important."
  • ConocoPhillips views the Permian Basin as a growth area. Its legacy leasehold position consists of approximately 1 million net acres, which contain more than one billion barrels of oil equivalent held in, e.g., EOR projects in conventional fields such as the Gandu. Its acreage in the basin includes approximately 123,500 net unconventional acres (Fig. 3).

Fig. 3. ConocoPhillips Permian Basin acreage, after ConocoPhillips June 2017 presentation.

Fig. 4. Devon acreage in Delaware Basin, after Devon June 2017 presentation.

Fig. 5. Pioneer land holdings in the Midland Basin, after Pioneer June 2017 presentation.

EOG currently holds 0.57 million net acres in the Permian Basin, after its 2016 acquisition of privately-held Yates Petroleum for $2.5 billion. Devon only operates in the western part of the basin, i.e., in the Delaware Basin (Fig. 4), while Pioneer focuses on the eastern part, namely, the Midland Basin (Fig. 5).

Concho has been a Permian pure play since its founding in 2004. It holds 0.6 million net acres in the basin, and maintains approximately 18,000 horizontal drilling locations (Fig. 6). The Permian Basin is significant to Cimarex as well. The majority of Cimarex's activity is currently in the Permian Basin and the Anadarko Basin in Western Oklahoma (Fig. 7). The Permian Basin accounted for 36% of its proved reserves and 56% of total production.

Apache calls the Permian Basin one of its core growth areas with over 3.1 million gross acres, or 1.7 million net acres, with 611 MMboe, or 47% of its worldwide reserves in the basin at year-end 2016. In September 2016, Apache announced that after over two years of extensive G&G work, aggressive acreage accumulation, and strategic testing and delineation drilling, the company declared the discovery of a 75 Tcf plus 3 Bbo resource play, "Alpine High," in southern Delaware Basin, spanning approximately 320,000 net acres primarily in Reeves County, Texas. Apache has secured 307,000 contiguous net acres (352,000 gross acres) at an attractive average cost of around $1,300 per acre, which have 2,000 - 3,000 future drilling locations identified in the Woodford and Barnett formations alone. Alpine High has 4,000-5,000 feet of stacked pay in up to five distinct formations including the Bone Springs, Wolfcamp, Pennsylvanian, Barnett and Woodford.

Fig. 6. Concho land holdings in the Permian Basin, after company presentation.

Fig. 7. Cimarex land holdings in the Permian Basin, after company presentation.

Exxon Mobil established its position in the basin through its 2010 purchase of XTO Energy, and doubled its presence there by acquiring Bass family-owned properties in January 2017. Never to be left behind by its archrival, Shell acquired 618,000 net acres in the Delaware Basin in 2012, as part of joint venture between Chesapeake and Anadarko.

These top ten landholders own approximately 84% of the total net acreage of the listed companies. Combined, they produced a total of 1.37 MMboe/d, contributing 76% of the total for the listed companies. The entire Permian Basin produced at 3.84 MMboe/d, consisting of 2.41 MMb/d of oil and 8,296 MMcf/d of natural gas, so the top ten participants account for 36% of that basin-wide output. In the Perman Basin, the top five oil producers are Concho, Devon, Pioneer, Cimarex and EOG, while the top five gas producers are Concho, Cimarex, EOG, Devon and Apache (Fig. 8).

Fig. 8. Top five oil and gas producers in the Permian Basin, updated through February 2017, after shaleprofile.com.

The Permian pure plays

A group of 13 Permian participants in the list belong to the so-called "Permian pure play," because their entire land holdings are concentrated in the Permian Basin.

These are Concho, private firm Endeavor Energy Resources LP, Energen (EGN), Diamondback (FANG), Parsley (PE), Approach Resources (AREX), RSP Permian (RSPP), Centennial Resources (CDEV), Jagged Peak Energy (JAG), Callon (CPE), Viper Energy Partners (VNOM), whose general partner is Diamondback, Resolute (REN), which is in the final stage of selling its assets outside of the basin, and Lilis Energy (LLEX) (Table 1).

Investors interest in the Permian play should pay special attention to these pure plays in the basin. Reserve and production growth in the Permian Basin may not move the needle for the geographically diversified super majors and large independents; but that is not the case for the Permian pure plays.

Not on the list

Conspicuously missing from the list are Shell (RDS.A; RDS.B), BP (BP), Hess (HES) and Chesapeake (CHK), each for a reason:

  • Hess is excluded because it only owns EOR assets in the basin. Hess announced on June 19, 2017 that it has entered into an agreement to sell its interests in the EOR assets, which produce a net average of 8,200 boe/d in 2016 net, in the Permian Basin to Oxy for $600 million, effective June 1, 2017. Included in the transaction are the Seminole-San Andres Unit (Hess 34.2% interest) and the Seminole Gas Processing Plant (Hess 46.6% interest) in Texas; the West Bravo Dome C02 field in New Mexico (Hess 100% interest); and a 9.9% non-operated interest in the Bravo Dome unit in New Mexico. The deal is expected to close August 1, 2017.
  • Shell acquired on Sep 12, 2012 from Chesapeake a total of 618,000 net acres, along with 26,000 boe/d production, in the Delaware Basin for a consideration of $1.935 billion; these acres are actually operated as a joint venture with Anadarko, the future of which is being negotiated as of mid-2017. Therefore, Shell indeed has a presence in the Permian Basin, which also explains the absence of Chesapeake.
  • In the aftermath of the Deepwater Horizon oil spill, distressed BP was forced to dispose a large slice of its assets including those in the Permian Basin, which were acquired by Apache on July 20, 2010. The $7 billion transaction involved all of the oil and gas operations, acreage and infrastructure in the Permian Basin, the Western Desert of Egypt, and substantially all of the upstream natural gas business in western Alberta and British Columbia.

Discussion and conclusions

One common theme among the major legacy operators in the Permian Basin over the past few years is to shift from conventional oil production, primarily EOR, to unconventional oil and gas development. By legacy operators, we mean Oxy, Chevron, Apache, ConocoPhillips, Devon, Pioneer, Concho, EOG, and Cimarex.

  • For example, Pioneer started up as a Midland Basin operator in the early 1980s, and built a 785,000-acre position in the Spraberry field over decades. But in 2011, it shifted from conventional vertical drilling and production to unconventional operations, and spent four years to transform its Wolfberry acreage into a horizontal play and shut down vertical drilling in early 2015.
  • For another example, unconventional plays become increasingly important for Concho; approximately 85% of its wells were drilled horizontally in 2015, and nearly 100% in 2016.
  • Apache plans to significantly increase activity in the Permian Region during 2017, following its discovery of the "Alpine High" resource play. During 2017, the company expects to average 15 drilling rigs in the Permian Basin and drill approximately 250 wells, which includes a four to six rig delineation drilling program at Alpine High. The company plans to allocate two-thirds of its 2017 capital budget to the Permian Basin.

This pivot follows technological advances that was first tested and developed between 1981 and 2000 in the Barnett Shale by Mitchell Energy, including fracturing technique and horizontal drilling. George Mitchell is credited with personally making a success of the Barnett Shale, thus creating the natural gas boom in the Barnett play, which was imitated by other companies, leading to many other shale-gas and tight-oil successes elsewhere, including the Permian Basin.

In the late 1990s and early 2000s, lessons gleaned from the Barnett Shale and multi-stage hydraulic fracturing techniques refined by George Mitchell started to be applied in the Permian Basin. The Wolfberry and Wolfbone tight oil plays, through directional well drilling and sophisticated fracturing, helped reverse the basin's production decline since the early 1970s (Fig. 9). As David Zusman of Talara Capital Management said about the productivity increase in the Permian Basin:

...there is directional drilling with longer laterals, rising proppant intensity in wells, tightening frac cluster spacing, and a shift to multi-well pad drilling - everything that allows operators to better stay in the producing zones and get more out of them. It has made the Permian the lowest cost basin in the United States, and likely the all-important marginal barrel globally.

Fig. 9. Increasing use of horizontal drilling (upper chart source: Baker Hughes) and reversal of output decline (lower chart source: EIA) in the Permian Basin.

For the companies that have established acreage positions in the Permian Basin, the goal is certainly to ramp up production. This is evident from the significantly increased 2017 capital budgets.

  • Oxy increased its 2017 capex to $3-3.6 billion, compared to $2.9 billion in 2016. Spending will increase significantly in the Permian Basin, especially in southeast New Mexico and the Greater Barilla Draw area, with 5 additional rigs. It has an estimated 11,650 drilling locations in the Permian Basin. Oxy production in the basin doubled from 2013 to 2016 and is expected to be doubled again over the next four years.
  • Chevron has a $19.8 billion capital and exploratory investment program for 2017, targeting "shorter-cycle time, high-return investments". Although the 2017 budget represents a reduction of 42% from 2015 outlays and is expected to be at least 15% lower than projected 2016 capital investments, however, in the upstream business, approximately $8.5 billion of planned capital spending relates to base-producing assets, including about $2.5 billion for shale and tight investments, the majority of which is slated for Permian Basin.
  • Exxon boosted its 2017 capital budget to about $22 billion from $19.3 billion in 2016. In January 2017, the late-comer to shale which had missed out on the first wave of the fracking revolution spent $6.6 billion to double its holdings in the Permian Basin. The company will spend more than $5.5 billion in 2017 to drill in the Permian Basin and Bakken shale, among other so-called short-cycle assets. In 2018, the company plans to devote 50% of the worldwide drilling budget to U.S. shale, and expects output from shale to grow an average of 20% annually to reach 750,000 boe/d by 2025. "The shift from long to short is really a reflection of the opportunity that has grown in the short-cycle business," new CEO Woods said. "That part of the business isn't in discovery mode; it's in extraction mode."
  • Apache has budgeted a capital investment of $3.1 billion for 2017, with $2 billion targeting growth opportunities in the Permian Basin. Of that amount, $500 million will be spent on infrastructure at the Alpine High discovery.
  • Devon budgets $700 million of E&P capital for the Delaware Basin, aiming to increase production by 20% within the year.
  • Pioneer's production more than doubled from 45 Mboe/d in 2011 to 112 Mboe/d in 1Q 2015. Pioneer continues to be the largest producer in the Spraberry/Wolfcamp with a resource potential of more than 11 Bboe and an inventory of 20,000 untapped horizontal drilling locations. Pioneer's 2017 capital budget calls for operating 18 horizontal rigs in the Spraberry/Wolfcamp in the Permian Basin during 2017, with capital expenditures for 2017 of $2.8 billion, which includes $2.5 billion for drilling and completion activities and $275 million for water infrastructure, vertical integration and field facilities.
  • Cimarex's 2017 drilling and completion budget of $550 million comes 70% higher than that of 2016. With that budget, it plans to drill 60 net wells, all horizontal, with $700 million earmarked for the Triple Crown gathering system in Culberson County and its Matterhorn gathering system in Reeves County.
  • Concho's 2017 capital plan is $1.4-1.6 billion, which is expected to deliver production growth of 20-24%. The vast majority (90%) of the capital is expected to be directed to drilling and completion, 40% for northern Delaware Basin with 8 rigs; 30% for the Midland Basin to run an average of five rigs; and 10% for the New Mexico Shelf with two rigs.
  • Diamondback has a 2017 capital budget of $0.8-1.0 billion, expecting to complete 130 to 165 gross wells with an average lateral length of about 8,500 feet.
  • Energen has budgeted $790 million for drilling and completions in 2017, up from last year's $433 million for drilling and development and $148 million for acquisitions. This year, the company plans to drill 83 net wells and complete 113 net wells. Except for four net vertical wells drilled to hold acreage, all new drills will be horizontal.
  • Approach Resources planned to spend $50-70 million in 2017 in southern Midland Basin.
  • RSP Permian has doubled its budget from last year, planning to spend $625-700 million in 2017, with $575-600 million for drilling horizontal wells and $70 million for construction of facilities and salt water disposal systems.

This is an abbreviated version of a research report previously published as part of The Upstream Oil Hub, our exclusive service at Marketplace on Seeking Alpha. To get an exclusive early view of all of our research reports, please sign up with The Upstream Oil Hub here.

Disclaimer: The author is not a registered financial advisor and does not purport to provide investment advice regarding decisions to buy, sell or hold any security. Before making any decision to buy, sell or hold any security mentioned in this article, investors should consult with their financial adviser. The author has relied upon publicly available information gathered from sources, which are believed to be reliable. However, while the author believes these sources to be reliable, the author provides no guarantee either expressly or implied. The author may choose to transact in securities of one or more companies mentioned within this service within the next 72 hours.

Disclosure: I am/we are long REN.

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: The author is not a registered financial advisor and does not purport to provide investment advice regarding decisions to buy, sell or hold any security. Before making any decision to buy, sell or hold any security mentioned in this article, investors should consult with their financial adviser.

The author has relied upon publicly available information gathered from sources, which are believed to be reliable. However, while the author believes these sources to be reliable, the author provides no guarantee either expressly or implied.

The author may choose to transact in securities of one or more companies mentioned within this service within the next 72 hours.