As of late 2018, the Permian Basin pushed the US to become the world’s largest producer of crude oil—flipping the country from foreign oil reliance, to net exporter status in just a few short years. Despite a flop in crude prices to close out the year, several Permian-based companies continue to find the play economic, including Permex Petroleum Corporation (CSE:OIL), Lilis Energy, Inc. (NYSE:LLEX), Occidental Petroleum Corporation (NYSE:OXY), Pioneer Natural Resources Company (NYSE:PXD), and Ring Energy, Inc. (NYSE:REI).
With many of the lowest breakeven price points in the country, the Permian Basin should continue to see significant development from companies with positions in the region and the drilling locations to act upon. One example is junior company, Permex Petroleum Corporation (CSE:OIL) that in the sector’s darker days quietly accrued a 41-100% Working Interest in 6,500 low-cost acreage position in the region. For a company of Permex’s size, amassing even half the size would be cost prohibitive, as M&A’s in proximity to the company’s lands are fetching figures between $10,000-$17,000 per acre to as high as $45,000 per acre.
More of the attention in the region is going to larger players, such as Occidental Petroleum Corporation (NYSE:OXY)—whom Permex has a strategic partnership with—or Pioneer Natural Resources Company (NYSE:PXD), who at lower than $30/bbl are known to be the lowest cost producer in the Permian.
It’s the lower breakeven prices that are enticing to the majors, while paying out higher acreage prices for lands such as Permex’s just to get to participate. Now it’s just a matter of waiting to see where the price of oil goes.
If the prediction Saudi Energy Minister Khalid al-Falih (that global oil stocks will fall by the end of Q1 2019), then the current oil price slump will be a temporary one. But, should the lower prices stick around longer than expected, the sector in North America will have all the more reason to focus its attention on the Permian Basin in the interim.
PERMIAN PRODUCTION ADVANTAGES
According to the US Department of Energy, the Permian Basin is expected to generate an average of 3.9 million barrels per day, roughly a third of total U.S. oil production—turning the nation long reliant on foreign oil into a net exporter in a few short years.
However, the threat against US production lingers in the form of the breakeven point for shale—which many tout as being the $50/bbl level. This is where the Permian’s economic advantages really begin to be more pronounced.
Permian breakeven prices can range between $32-47/bbl. This leaves the door open for even junior companies such asPetroleum Corporation (CSE:OIL), which just released a shareholder letter from its CEO, Mehran Ehsan, discussing the company’s future, and its advantages through its land position and economics.
"[A priority] this year is to maximize our total barrels of oil equivalent in daily production for the company. This will put Permex in an organic growth model without external dependencies even at $40 per barrel oil," said Ehsan in the letter.
"Since the downturn in prices, only a couple of US shale oil plays have demonstrated the economic resiliency to justify continued investment, drilling and A&D activity," he added. "The Permian in West Texas & South East New Mexico is top of that list by a huge margin."
Permex’s positioning is in one of the lowest cost (i.e., break-even) basins in what Ehsan termed as a "crude oil world defined by a lower global supply cost-curve was imperative to building long-term shareholder value… Focusing on the San Andres formation within the basin further cements our low-cost break-even position in comparison to higher cost formations in the region, such as Wolfcamps and Bonesprings."
Ehsan’s company increased its Proved plus Probable reserves year-over-year by 22%, to a value of $142 million (or 9 million barrels of oil equivalent). They’ve also increased their Proved (1P) reserves total to $79.5 million (or 4.32 million barrels of oil equivalent).
Even at a conservative per-barrel-in-the-ground value of $15/bbl, the company’s Proved reserves alone would be worth $64.8 million—which is nearly 10 times Permex’s current market cap.
BUILDING UP A PERMIAN STOCKPILE
Since the beginning of oil’s price downturn, only a pair of U.S. Shale oil plays have demonstrated the economic resiliency to justify continued investment, drilling and A&D activity. The Permian in West Texas & South East New Mexico is top of that list by a huge margin.
Permex’s positioning in these two regions puts the company into one of the lowest cost (i.e., break-even) basins in a crude oil world defined by a lower global supply cost-curve was imperative to building long-term shareholder value. Ehsan’s company is focusing on the San Andres formation within the basin further cements our low-cost break-even position in comparison to higher cost formations in the region, such as Wolfcamps and Bonesprings.
Lower oil prices are what led to Permex’s positioning in the first place. Built upon a team motto of “not letting a good disaster go to waste”, the company took advantage of the most recent downturns, and will look to continue picking up hawkish positions in the Permian as the industry starts its next correction. The strategy is to further cement the company in a long-term growth phase while simultaneously sustaining itself during a low industry cycle.
FURTHER PERMIAN PRODUCERS
Lilis Energy, Inc. (NYSE: LLEX)
Last summer, mid cap Lilis Energy shifted its headquarters to Houston, having come back from the edge of bankruptcy three when the company was based out of Denver. After avoiding bankruptcy, Lilis sold off its Colorado holdings, and shifted its focus to the Permian Basin. The company bought up acreage at low prices during the energy bust period. Most recently, Lilisannounced initial results from its Tiger #3H well in Bone Spring with an initial 24-hour product rate of 1,821 boe/d, including 801 boe/d (63% liquids, 44% oil), on a three-stream basis, equivalent to 239 boe/d per 1,000 ft.
Occidental Petroleum Corporation (NYSE: OXY)
After pulling out of its interests in Qatar, Occidental Petroleum indicated it would be pulling out has continued to ramp up its Permian operations. Sporting a total combined Permian production of approximately 354,000 boe/d, and controlling approximately 2.5 million net acres in the shale play, Occidental is the largest operator in the region. The company entered the region back in 2000 when it acquired then Texas’ largest oil and gas producer, Altura Energy. In 2017, Oxy acquired more Permian wells from Hess Corp for $600 million, and last year partnered with small-cap company Permex Petroleum possibly giving an opportunity to pass the torch of knowledge. Stacking up its inventories in Delaware's Bone Springs formations and Wolfcamp play will likely help Occidental meet its target of 30% to 35% of compound annual production growth rate (CAGR) in the Permian from 2016 to 2019.
Pioneer Natural Resources Company (NYSE:PXD)
At a breakeven oil price of $30 per barrel, Pioneer Natural Resources is possibly the most economically sound company in the country, let alone the region. With an improvement of the company’s pipeline takeaway capacity scheduled for this year, and with the second most drilling permit applications submitted (405), Pioneer is likely in for a banner year in the Permian. The Irving, Texas-based company has roughly 750,000 gross acres in the Midland (a Permian sub-basin) with more than 20,000 drilling locations.
Ring Energy, Inc. (NYSE: REI)
While still a relatively smaller player within a neighbourhood of giants, Ring Energy is consistently growing its presence in the Permian Basin. The company kicked off 2019 by closing a transaction with Tessara Petroleum Resources, a wholly owned subsidiary of The Carlyle Group L.P., for assets located in Andrews County, Texas. Ring issued 2,623,948 million shares of its common stock valued at $5.80 per share. The assets consist of 4,763 net acres, where Ring will be the operator, and have a 100% working interest (75% net revenue interest). The acreage offsets the majority of the Company’s top producing wells.Management estimates that this acquisition, in combination with additional smaller surrounding leases the Company has acquired, will add 5,313 net acres and 55 new gross horizontal drilling locations.
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