Land prices in West Texas are getting a little ridiculous.
The Permian Basin has emerged more or less as the last man standing for shale drilling in the United States, as low oil prices push so many shale regions into unprofitable territory. But drilling in the Permian can still work at sub-$50 oil, and as a result, oil companies are cancelling projects nearly everywhere else and pouring their money into the Permian.
A rash of deals in West Texas this year illustrates the sudden land rush for acreage in the Permian, with large and small companies alike looking for a way to get in on the latest hot thing in the oil world. Wall Street is also hoping to capitalize on the Permian as well, with private equity dumping money into Permian assets.
Here are a small sampling of the deals in recent months: SM Energy paid nearly $1 billion in August for 25,000 acres in the Permian; Concho Resources threw down $1.6 billion for 40,000 acres; and Parsley Energy agreed to pay $400 million for 11,000 acres this summer. SM Energy paid just shy of $40,000 per acre for its acquisition. But in June, QEP Resources forked over about $60,000 per acre, the highest price per acre on record. By way of comparison, that is also double the average paid for acreage back in 2014 – a time when oil prices were sky-high.
As Bloomberg noted in an article on Monday, the Permian has become the hottest shale basin in the country for a few reasons. First, it is still profitable with oil prices wallowing in the mid-$40s per barrel. The Permian, unlike other basins, has several stacked formations, allowing companies to drill multiple horizontal wells through multiple formations from a single vertical well. More production per well means more revenue. Second, the Permian no longer has to compete with as many shale plays for capital. The oil industry – and Big Finance – is desperate for returns, and as such, are flooding the Permian with money. As capital competes for less and less acreage, land prices go up.
“When oil prices were high, there was a high supply of acreage with economic drilling opportunities,” Ron Gajdica, co-head of energy acquisitions and divestitures at Citigroup, told Bloomberg. “Now, in a $40 to $50 oil price environment, acreage with economic locations is scarcer. There are only a limited amount of opportunities and many of them are in the Permian.”
Wall Street has rewarded some of the largest Permian drillers in recent months. Pioneer Natural Resources, for example, has seen its share price rise roughly 20 percent since June, even though oil prices are now lower than they were then. SM Energy’s stock also shot up after it made its pricey Permian acquisition in August. Related: Shifting Strategies: Big Oil Looking At Low-Cost Fields
The rig count has rebounded sharply in the Permian as companies cut their priorities elsewhere. The total U.S. rig count is up 102 rigs since bottoming out in May. The Permian has accounted for 65 of those additional rigs.
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But while investors are focusing on the Permian, not everyone in the industry is willing to pay the hefty land prices found in West Texas. BP, for example, is declining to make a splash in the Permian, instead looking abroad for better deals. BP’s CEO Bob Dudley says Argentina is much more attractive to the British oil giant than the white-hot Permian Basin. The Texas shale basin is simply too expensive, while Argentina has shale acreage that is just as promising. Argentina’s Vaca Muerta might have higher production costs, but it also has fewer drillers to compete with.
“I’m not surprised because valuations in the Permian have become expensive,” Iain Armstrong, an analyst at Brewin Dolphin Ltd, told Bloomberg in an interview, referring to Dudley’s comments. “The Vaca Muerta is seen highly prospective and Pan American has been around in Argentina for a while and that gives them some voice,” Armstrong said, referring to BP’s Argentina joint Venture.
But for those smaller, less internationally-focused oil and gas companies, the Permian remains king, and a long line of companies will continue to plunk down eye-watering sums for a foothold in the West Texas shale basin.
By Nick Cunningham of Oilprice.com
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