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Gregory Brew

Gregory Brew

Gregory Brew is a researcher and analyst based in Washington D.C. He is currently pursuing a PhD at Georgetown University in oil history and American…

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The Permian Stocks Of 2017

Eagle Ford rig

Activity in the U.S. domestic energy sector in 2017 is off to a strong start, as U.S. independents take advantage of rising prices and an increasingly-friendly energy atmosphere to expand operations. The way is open for smaller U.S. firms to increase profitability after a tough few years, with greater speed than the majors.

Signs that the OPEC cuts are actually taking effect, and that the current above-$50 price level is likely to stick around for the foreseeable future, has U.S. energy producers looking hopeful that 2017 will be a banner year. Confidence in Texas and Oklahoma is particularly high. Activity in the nation’s most promising oil field, the Permian Basin of West Texas, offers a glimpse of how the climate is improving nation-wide.

After a year of frantic buying and selling, with capital taking advantage of a volatile marketplace, more reliable conditions going forward will see U.S. companies concentrate on fundamentals and on-shore plays like the Permian and Marcellus, which are particularly well-positioned for future profitability. The U.S. rig count is now reliably increasing, with Baker Hughes reporting in late December a count of 523, just 15 short of the count in late 2015. Of that number, a whopping 262 rigs are in the Permian.

Hiring is up, with Halliburton reportedly bringing on 200 more staff in the Permian, and bids are increasing after a sluggish year. Sentiment indicates that 2017 could be the “year of the Permian,” as the field becomes more and more the center of US activity.

In the Permian, Delek US Holdings (DK) announced a complete takeover of Alon USA Energy Inc. (ALJ), increasing exposure to low-cost crude oil in the nation’s fastest-growing field. The combined company will possess a refining system of about 300,000 bpd in locations scattered across Texas and New Mexico, as well as a marketing apparatus of about 600,000 bpd on the Colonial Pipeline. Related: Goldman Sachs: Oil Prices To Remain Under $60 In H1 2017

Gabriele Sorbara, of Williams Capital Group LP, has selected a few picks for companies to watch in early 2017. Energen Corp. (EGN) is expected to expand production twenty-percent from its bas in the Permian over the next three years. Its liquid position, about $1.5 billion, will likely get a boost if it succeeds in selling off its assets in the Central Basin. While its revenues were down nearly forty-percent in late 2016, Energen Corp. is expected to trade higher in 2017, beating some of its peers.

Sorbara has also pegged Laredo Petroleum Inc. (LPI) and Newfield Exploration (NFX) as firms to watch. Laredo is expected to spin off some assets in order to improve profitability for private equity firm Warburg Pincus, which owns about a third of its stock, while Newfield has around $2.3 billion in liquidity, improved by the sale of all its Texas assets last summer, for a cool $390 million, and it should be judged alongside major Permian Basin players due to its holdings in the Anadarko Basin. A comparison with bigger energy firm Continental Resources (CLR) in the STACK play in Oklahoma has Newfield coming out on top, despite it being a smaller, leaner firm. Sorbara also thinks PDC Energy Inc. (PDCE) and SM Energy Inc. (SM) are worth watching. Related: Hedging Rush Keeps Oil Prices Down

SM Energy (SM) meanwhile is planning to divest from its non-operating Eagle Ford assets, valued at around $800 million, in order to concentrate on its Midland Basin activities, where it predicts strong growth. Sales in October and November saw SM’s footprint in the Midland increase to about 87,000 acres, compared to an existing stake in the Eagle Ford of about 161,000 acres. Yet the company’s leadership considers the Midland to be the way of the future, with Howard County in particular representing a highly-productive asset for 2017.

These companies, all of which are pegged as “buys” and seem likely to thrive in 2017 as they shed debt and increase revenue, offer a glimpse of what the new year could bring to U.S. producers. With OPEC cuts bringing up prices and a favorable domestic energy climate, U.S. producers, particularly those based in the Permian, have a lot to look forward to, at least as long as prices stay buoyant, as they should well into this year despite an initial dip.

By Gregory Brew for Oilprice.com

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