DUC Deep Dive: Midland Basin

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Includes: APA, CPE, CVX, CXO, ECA, EGN, EPE, FANG, LPI, PE, PXD, QEP, RSPP, SM, XOM
by: GrowthHunter
Summary

Total Midland Basin DUCs (1,170) ~40% of total Permian DUCs (2,880).

SM Energy has most DUCs (91) in the Midland Basin.

Exxon Mobil subsidiary XTO is well positioned to accelerate production.

Over the past few months, there has been much discussion around the growing inventory of Drilled Uncompleted Wells ("DUCs") in the United States and the implications for WTI prices. For those not familiar with DUCs, they are wells that have been drilled by E&P companies but have not been fracked and therefore are not producing oil and natural gas yet. The strategic importance of DUCs to E&Ps is that if oil prices rise, companies can relatively quickly frack these DUCs and bring production online to take advantage of higher oil prices.

As the chart shows below, the rise in DUCs has been predominantly driven by an increase of DUCs in the Permian Basin, which as of January 2018 had 2,880 DUCs according to the EIA.

Source: EIA, Internal

While the supply/demand implications of such a large DUC build have been widely debated, I have spent time over the last few days digging deeper into the DUC count in the Midland and the Delaware sub-basins in an effort to identify which companies have the capability to quickly ramp production which may be underestimated by the market. Below is my analysis of the Midland Basin DUC inventory, with a follow up piece related to the Delaware Basin to follow over the next few days (follow me here to receive updates).

Midland Basin DUC Map

Based on Midland Basin DUC data, there are currently 1,170 DUCs in the Midland Basin, representing 40% of the total Permian Basin DUCs as seen in the EIA data above. Not surprisingly, as seen in the map below, the major concentrations of DUCs are located outside of the absolute core of the Midland Basin (notice the "donut hole" that runs from NE of Midland to SE of Midland). This reflects operator focus on completing wells in ultra-core locations, while waiting to complete wells that are potentially less economic.

Source: DrillingInfo,

Based on data as of 2/21/2018, the top 20 operators in terms of total DUCs in the Midland Basin are as follows: SM Energy (SM), Pioneer (PXD), Diamondback (FANG), QEP (QEP), Parsley (PE), Surge Energy, Endeavor, XTO (subsidiary of XOM), Encana (ECA), Energen (EGN), Chevron (CVX), Crownquest, RSP Permian (RSPP), Hunt Oil, Concho (CXO), Apache (APA), Laredo (LPI), Callon (CPE), Legacy Reserves and EP Energy (EPE).

As noted above, I performed this analysis to identify companies which may have more completion-ready wells than the market may appreciate and/or have an outsized inventory relative to their total position in the Basin. While it is not surprising that PXD and FANG have large inventories of DUCs given their scale in the basin, I find it interesting that SM has a basin-leading 91 DUCs given its relatively smaller size. Second, I find XTO's (subsidiary of XOM) DUC count as a sign that the company has the inventory necessary to accelerate their production in the Permian as recently indicated.

Source: DrillingInfo, Internal

The next interesting aspect to look at is which counties have the lion share of DUCs, with Midland, Martin and Howard counties unsurprisingly leading the charge.

Source: DrillingInfo, Internal

Finally, given the expected service cost-inflation expected in the Permian Basin over 12 months, I believe having a concentrated inventory of DUCs will prove valuable as operators look to gain economies of scale in sourcing water, sand and other necessary completion-related services. Based on that rationale, it appears that SM, QEP, FANG, XOM, PE and ECA have some the most concentrated and largest inventories of DUCs, which should benefit those firms in 2018.

Source: DrillingInfo, Internal

Conclusion

Based on the analysis presented above, it would appear that SM is punching above its weight in terms of total DUCs in the Midland Basin and that XOM (XTO is subsidiary) is well prepared to accelerate production in the basin. Additionally, SM, QEP, FANG, XOM, PE and ECA have the most concentrated portfolios of DUCs in the basin, which I believe will provide cost benefits as service prices increase in 2018.

Over the next few days, I will be releasing a similar analysis for the Delaware Basin and will provide a comparison to the trends and/or factors revealed in the Midland Basin. Please follow to receive updates via email.

Disclosure: I am/we are long RSPP. 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.