Hartstreet: The Permian Bottleneck Will Continue As Huge Well Results Continue

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Includes: APA, APC, CHK, COP, CXO, DK, DVN, EOG, ET, FANG, KMI, MMP, MPC, MPLX, OXY, PAA, RDS.B, SM, XOM
by: Michael Filloon
Summary

Permian production continues to drive higher in the face of wide differentials and a pull back in oil prices.

There are several ways to play this through E&Ps and pipelines, as the pullback in oil prices is overdone and take away capacity in on the way.

PAA looks like a way to play the Permian pipeline build out, as it has significant exposure to the basin.

CXO has 640,000 acres in the Delaware and Midland basins and continues to produce a large number of monster locations.  It provides a Permian focused operator with a large inventory of locations to complete.

The market has been hit hard and many of the operators stock prices have suffered, but there seems to be value in the pullback.

The Permian bottleneck has been one of the top stories of 2018. The opinion earlier in the year was production would decrease as differentials widened. This has not occurred to the degree expected. No one reason could articulate why, but the main narrative is production. Locations in the Delaware continue to outperform. This outperformance is so great that differentials have not slowed development. These types of results are limited to the core, but we are seeing multiple cores emerge in west Texas. There are a number of ways to play upcoming pipeline capacity, whether its via pipelines or operators. Energy Transfer LP (ET), Magellan Midstream Partners LP (MMP), MPLX LP (MPLX), and Delek US Holdings Inc (DK) are working together on Permian Gulf Coast Pipeline. It will not be up and running until mid-2020. Marathon (MPC) has a controlling interest in MPLX and may also be a way to play the pipeline. More on this can be found in this article. MPC might bring on Plains All American Pipeline LP (NYSE:PAA), and Exxon Mobil Corporation (NYSE:XOM) to help with the project.

There have been 31 completed horizontals that began producing on Jan 1 of 2017 that have produced at least 500K barrels of oil. All of these locations were located in Texas or New Mexico.

Major Oil Producers By State

Source: Welldatabase.com

Texas has nineteen completions and New Mexico has twelve. Cumulative oil production by state for these nineteen location is shown below.

Cumulative Oil Production By State Source: Welldatabase.com

These locations have produced almost fourteen million barrels of oil in Texas and eight million barrels of oil in New Mexico. The majority of huge wells are located in the western Permian.

Type Curve Oil Production By State Source: Welldatabase.com

New Mexico and Texas horizontals produce roughly the same oil curve. New Mexico is somewhat better, but the differences are negligible. The average is excellent, producing more than 600K barrels of oil in less than two years.

EOG Resources (EOG) has the largest number of locations. This is not a surprise as it continues to outperform in all basins it has leasehold.

Top Producing Horizontals By Operator Source: Welldatabase.com

EOG completed six in this list. Concho (CXO) and Conoco (COP) had five. It was followed by Diamondback (FANG), Shell (NYSE:RDS.A) (RDS.B), Anadarko (APC), Apache (APA), Chesapeake (CHK), Devon (DVN), Kinder Morgan (KMI), Mewbourne, SM Energy (SM), and Occidental (OXY). EOG is the top cumulative producer of oil.

Cumulative Oil Production By Operator Source: Welldatabase.com

EOG produced 4.6 million barrels of oil followed by Concho and Burlington at 3 million barrels. Lea and DeWitt have the largest number of top oil locations.

Number Of Oil Locations By County Source: Welldatabase.com

Lea has more than double the locations of any other county in the US. Seventeen horizontals are in the Delaware versus five in Midland. There are eight in the Eagle Ford. This substantiates what we have reported about monster wells in east Texas. The Eagle Ford core has remarkable geology as seen through repetitive EOG results.

Oil Type Curve By County Source: Welldatabase.com

Reeves (yellow) has the best oil type curve of all counties. This was surprising as most analysts think the core would be located in north Loving and southern Lea. It is followed by Karnes, Midland, Lea, DeWitt, Howard, Dimmit, and Loving.

Type Curve All Oil Wells Source: Welldatabase.com

The chart above provides the average production of the 31 monster wells. Oil (green), natural gas (red), water (blue) and the number of locations (black) are all listed. The average well produces 623K barrels of oil in the first 21 months.

Month Oil bbls Gas Mcf BOE Water bbls
1 44,690 62,130 55,405 71,563
2 74,044 119,330 94,623 109,288
3 70,213 132,407 93,047 138,710
4 56,302 112,171 75,647 116,032
5 43,645 83,005 57,959 72,200
6 35,961 71,033 48,211 64,147
7 34,167 66,834 45,693 59,647
8 31,477 62,178 42,200 50,747
9 30,194 54,686 39,625 54,542
10 26,002 52,895 35,125 39,686
11 23,092 47,668 31,313 42,773
12 21,500 49,580 30,050 89,797
13 20,956 49,733 29,532 49,904
14 16,709 37,268 23,136 39,972
15 18,249 39,884 25,127 29,584
16 19,276 35,293 25,362 31,006
17 13,195 28,788 18,159 22,712
18 13,232 26,712 17,838 20,059
19 11,391 20,719 14,964 20,294
20 9,126 14,306 11,593 24,823
21 9,921 16,418 12,752 1,445
Total 623,342 1,183,038 827,361 1,148,931

Source: Welldatabase.com

Average production is listed above, and shows how these wells decline over time. The main question has to do with economics. How can operators continue to drill these wells with oil prices and differentials at a yearly low? Using a WTI price of $52/bbl and a differential of $8/bbl we see $44/bbl. We pull an additional $10 in costs. This decreases the oil price to $34/bbl. Oil revenues are $21.2 million in 21 months (and the well is still producing). Natural gas revenues are $5.3 million. This does not include NGLs produced, so I did not pull costs from the number. Each well provides and income of $19 million in just 21 months after we pull the $7.5 million well cost. The 20% royalty interest is removed leaving a net profit of $15.2 million. In twenty months, one well pays to drill and complete two others. Obviously, these are not typical wells, but it shows how these core areas are driving results.

In summary, well results from the Permian continue to show upside even in a lower oil price environment. Many of the operators are hedged between $60 and $70/bbl plus have hedges on differentials providing protection. Even without hedges, operators can still do well in the Delaware and Midland core based on some of the unconventional results in the US. Pipeline capacity is an issue, but projects are planned and we would expect differentials to drop. Some of these projects will allow operators to get LLS pricing. There is upside to both PAA and CXO going forward given the production results from current well designs.

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Disclosure: I am/we are long cxo, eog, fang. 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.