Why Wall Street is throwing billions at the Permian

August 31, 2016 10:15 AM

Some see the flood of cash into the Permian as a sign that the oil market is rebounding strongly. “It looks like we’ve come out of the trough portion of the cycle for the oil-and-gas sector and are on the road to recovery, though the road will likely be winding and it will take some time to get there,” Angelo Acconcia, who oversees Blackstone’s oil and gas investing, told The Wall Street Journal. 

But the flood of investment is also jacking up land prices in West Texas as more and more companies compete for prime acreage. “Some are starting to feel like this is a bubble,” said Charles Robertson II, an analyst at Cowen Group Inc., told The Wall Street Journal. 

Oil analyst Art Berman goes further than that, arguing that the Permian is merely the “best of the bad lot.” Many places in the Permian still lose money with oil prices below $50 per barrel, he says, but because so much capital is hunting for yield in a low-yield environment, there is a lot of available money from Wall Street that is flowing out of other places like the Eagle Ford and the Bakken and into the Permian. But just because money is pouring into the Permian, it does mean that things will end well for Permian drillers. Berman calls it a “race to the bottom,” as huge volumes of cash inflate a specific shale basin for a period of time, but the resulting production pushes oil prices back down. Companies post losses and some even go bankrupt. Investors grow wary of that particular geographic area and move on to another, repeating the process. 

It is unclear if that is what will happen in the Permian, but for now, things appear to be back on the upswing as shale drillers increasingly concentrate their efforts in West Texas. 

Page 2 of 2
About the Author

Nick Cunningham, http://oilprice.com