Why Wall Street is throwing billions at the Permian

August 31, 2016 10:15 AM

The collapse of oil prices has ground shale drilling to a halt, but the one region where drilling is still active, and even increasing, is in West Texas. 

The Permian Basin is one of the last profitable areas to still drill with sub-$50 oil, and as other regions fall by the wayside, an increasing portion of drilling activity and spare investment dollars are flowing into the Permian. The rebound in the rig count in the U.S. is largely concentrated in the Permian. The West Texas shale basin has captured two-thirds of the 90 oil rigs that have been added since hitting a nadir in May. 

On Aug. 25, Blackstone Group announced its decision to inject $1 billion into Permian assets in a partnership with a Fort Worth-based affiliate of Jetta Operating Co. The companies are essentially creating a pure play company to target the Delaware Basin in the Permian, the latest vote of confidence for a region that is undergoing a resurgence. 

The move comes after a handful of other billion-dollar deals targeting the Permian in just the past few weeks. 

SM Energy announced in early August that it would pay just shy of $1 billion to add nearly 25,000 acres in the Permian, doubling its holdings there. A week later Parsley Energy said it would acquire more than 11,000 acres for $400 million. Also, Concho Resources announced its decision to pay $1.6 billion for 40,000 acres in the Midland Basin in the Permian. Parsley and Concho both issued new equity to pay for the acquisitions and investors appeared enthusiastic about the move – The Wall Street Journal reported that Parsley received orders for more than four times the number of shares it was issuing for the Permian acquisitions. 

Discussing his company’s plans for the region, Concho’s CEO Tim Leach said that the Permian has some of “the hottest zip codes in the industry.” As Bloomberg noted in an Aug. 8 article, QEP Resources paid $60,000 an acre to an undisclosed owner in June. In late August, PDC Energy paid an investment firm $1.5 billion for Permian assets. In a July research note to clients, Eli Kantor of Iberia Capital Partners LLC said that deals in the Permian are at an all-time high. 

The rash of deals exemplify the latest trend as the oil markets slowly move towards balance and oil prices continue to languish below $50 per barrel. Other shale regions such as the Bakken, the Eagle Ford and the Niobrara – not to mention major shale gas plays such as the Marcellus – have fallen out of favor with both the oil industry and Wall Street. Pioneer Natural Resources, for example, announced its decision in June to allocate 90% of its capex to the Permian, or about $1.8 billion. Other firms have also announced their decisions to step up drilling in the Permian this year, including companies like Apache Corp., Cimarex Energy and Occidental Petroleum. 

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About the Author

Nick Cunningham, http://oilprice.com