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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Oil Majors Scrambling For Acreage In The Booming Wolfcamp

With OPEC’s decision to cut production looming over the oil market, producers still have one corner of the globe to turn to. The region of West Texas is already known for its abundance of crude oil but may have still been underestimated. This past Tuesday, the U.S. Geological Survey reported that there is still the potential to drill 20 billion barrels of crude oil from the Permian Basin. Oil majors are rejoicing over this news as it means there is still the opportunity to drill upwards of $900 billion worth of shale.

Pioneer Natural Resources Co. is the largest producer in Wolfcamp, holding over 800,000 acres of land. As of 2015, Pioneer was producing over 112 thousand barrels of oil per day. Pioneer believes the basin could hold as much as 75 billion barrels of oil, significantly more than the survey claims. If Pioneer were to take advantage of resources available they would solidify their position as the second largest producer in the world, second to majors in Saudi Arabia.

Apache Corp. has strategically purchased over 350,000 acres in the southern corner of the Permian Basin over the past year at a discounted price. Many believed the region, now known as Alpine High, to be fruitless but their own exploration discovered 3 billion barrels of oil. Apache’s stock climbed $3.44 on Tuesday as investors heard news there may be even more oil than predicted. Having surpassed their price target, Apache will need to be revaluated but is currently seen as a hold. Based on future forecasts, a speculator could assume a higher price target is probable.

Diamondback Energy Inc. released their 3rd quarter financial and operating results on November 7th, highlighting their development of seven new wells in the Wolfcamp formation. Diamondback’s stock extended more than $2 Monday night just before the oil estimate, showing clear signs of an association. Related: Why The Permian Just Got Even Hotter

On November 10th, ConocoPhillips adjusted the estimates for their fields. The figure nearly doubled, moving from a 1-billion-barrel estimate made last year to 1.8 billion barrels. The total may even be higher, considering this is the sum for oil accessible for less than $40 per barrel.

If oil prices were to rise, perhaps due to an OPEC agreement to freeze production, any of these companies could benefit. Oil fields have been abandoned entirely because the cost to produce exceeds the price majors can sell it for. There would be a strong correlation between OPEC cutting production and the value of these American producers’ shares. Investors could finance the purchase of oil futures by writing put options in any of the companies mentioned earlier.

On the other hand, if an OPEC deal is not to emerge, oil prices will continue to rise. The producers in the Permian Basin, however, will continue to produce as long as production is cost effective. Business for the American majors would continue to grow and their stock value in accordance, but not nearly on the same scale.

By Michael McDonald of Oilprice.com

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  • Bill Simpson on November 19 2016 said:
    And Texans will tell the rest of the country how great their free market economy is, and how if the rest of the country just adopted their way of life, we would all have a great economy and great universities like they do. Well, if we were sitting on a trillion dollars of black gold under out feet we would all be richer. Kuwait is doing quite well too, so is the UAE. So quit bragging and preaching to the rest of us. You got lucky, nothing more. Like Trump, he is rich mostly because his daddy was rich. "You know money, money changes everything," Cyndi Lauper.

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