• 4 minutes Some Good News on Climate Change Maybe
  • 7 minutes Cuba Charges U.S. Moving Special Forces, Preparing Venezuelan Intervention
  • 12 minutes Washington Eyes Crackdown On OPEC
  • 15 minutes Solar and Wind Will Not "Save" the Climate
  • 6 hours Most Wanted Man In Latin America For AP Agency: Maduro Reveals Secret Meetings With US Envoy
  • 7 hours And for the final post in this series of 3: we’ll have a look at the Decline Rates in the Permian
  • 15 hours Amazon’s Exit Could Scare Off Tech Companies From New York
  • 23 hours Prospective Cause of Little Ice Age
  • 1 day Former United Nations Scientist says the UN is lying about Global Warming and Sea-Level changes
  • 17 hours And the War on LNG is Now On
  • 15 hours L.A. Mayor Ditches Gas Plant Plans
  • 7 hours *Happy Dance* ... U.S. Shale Oil Slowdown
  • 2 days Maduro Asks OPEC For Help Against U.S. Sanctions
  • 2 days Qatar Petroleum, Exxon To Proceed With $10 bln Texas LNG Project
  • 1 day Solar Array Required to Match Global Oil Consumption
  • 1 day Europe Adds Saudi Arabia to Dirty-Money Blacklist
Alt Text

Is The Downside Risk For Oil Growing?

A large increase in the…

Alt Text

Why WTI Is A Global Oil Market Benchmark

As U.S. crude oil production…

Alt Text

Oil Prices Drop After Touching 2019 High

Oil prices fell on Monday…

Oil & Gas 360

Oil & Gas 360

From our headquarters in Denver, Colorado, Oil & Gas 360® writes in-depth daily coverage of the North American and global oil and gas industry for…

More Info

Trending Discussions

High Costs Are Pushing Investors Away From The Permian

High acreage costs beginning to affect economics in the Delaware

The Permian has enjoyed a rush of capital since oil prices began to recover from a low of $26.21 in February of last year.

The play is home to some of the best economics in the country, making it a prime target for E&P companies looking to maximize profit in a lower price environment. But the surge in land costs is leaving little room for new investors to profit.

The Delaware basin, the Permian’s hottest zone, is beginning to become a victim of its own success. EnerCom Analytics’ well economic models indicate that the internal rates of return (IRRs) in the Delaware are now lower than those seen in the Midland due to the high cost of land.

At $45 WTI, EnerCom’s well economics models show IRRs in the Midland of 22.8 percent compared to 21.5 percent in the Delaware when acreage costs are included in the equation. The cost per-acre in the Delaware is 65 percent higher than in the Midland at an average of $33,000 per acre.

(Click to enlarge)

Economics in every basin are expected to see pressure as oil prices remain in the low- to mid-$40 range and oilfield service providers, who are in high demand for well completions and drilling, look to increase their prices. Combined with the high premiums in the Permian, this barrage of pressuring factors is making it more difficult for new investors to enter the play, and those with exposure are beginning to pull back.

Service costs are expected to increase between 10 percent and 15 percent, according to EnerCom Analytics, with some E&P companies saying they could increase as much as 20 percent. In EnerCom’s March Energy Industry Data & Trends, the firm found that most basins could absorb even the high-end of those estimates at $50 per barrel WTI, but with prices floating around $45 per barrel, it will be much more difficult for E&Ps to continue generating 20 percent IRRs or better.

(Click to enlarge) 

Based on EnerCom’s models, only the Midland could handle more than a 10 percent increase in service costs at $45 per barrel with the high per-acreage cost of the Delaware pushing the play’s IRRs beneath the 20 percent IRR threshold. Related: Bank Of America: Expect $30 Oil

Eight hedge funds have reduced the size of their positions in ten shale firms with exposure to the Permian by over $400 million, according to information from Reuters. The value of these funds’ positions in the 10 Permian companies declined by 14 percent, to $2.66 billion in the first quarter 2017 from $3.08 billion in the fourth quarter of 2016.

Less room to run

Investors continue to give Permian players a premium multiple compared to companies in other parts of the country, but some firms are beginning to worry operations in the region do not merit the higher valuations.

Concern about inflated land costs and weakness in oil prices has some firms worried Permian players may not fly much higher. The 10 companies examined by Reuters were down 18 percent already this year compared to a 13 percent decrease in the S&P 500 energy sector.

EnerCom’s analysis of a peer group of Permian pure-play companies found the companies were struggling more than the Reuters information indicated. Looking at the performance of seven Permian players compared to the XOI index, companies with operations in the region were underperforming the wider energy index in all cases.

The XOI is down 12 percent YTD while the seven Permian companies averaged a loss of 34 percent so far in 2017. WTI is down 15 percent over the same time period.

By Oil and Gas 360

More Top Reads From Oilprice.com:




Download The Free Oilprice App Today

Back to homepage

Trending Discussions


Leave a comment

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News