Permian Basin Investing

Brian Hicks

Written By Brian Hicks

Posted August 9, 2013

You’re on cross-country trip with the family, cutting across a barren West Texas highway into New Mexico. You’ve been driving all night, and you’re quite tired.

Along the way, you begin to notice a line of makeshift trailers lined along the edge of road, spread out far into the dirt-ridden fields. What was once open pasture and an awe-gazing horizon has now become a cramped housing industrial complex of slapped-together tenement homes.

Permian Basin Map

You’ve been driving for a long while and want to get some sleep in a motel before the long drive the next day. But the clerk tells you all rooms are booked up.

You’re frustrated and want something to eat, so you stop by a local diner to find the place flooded with hungry oil workers scarfing down breakfast in preparation for their day shifts. The waitress tells you it will be an hour before you and your family can be seated.

If you talk to some residents out there, they’ll complain about the lack of affordable housing and skyrocketing rents. And their complaints are legitimate. This is what life is like in booming oil towns, and you can see it in states like North Dakota, Pennsylvania, and Texas, to name a few.

But from an investment standpoint, we see bustling oil towns as a sign of continued growth and prosperity, and the Permian Basin is one such place.

The Permian Basin encompasses West Texas and southeastern New Mexico. It covers roughly 250 to 300 miles of land and comprises 7,000 oil fields and 59 counties. There is 41 trillion cubic feet of technically recoverable reserves, while an estimated 1.3 billion barrels have not yet been discovered.

Original oil in place could be 106 billion barrels. As much as 5 trillion cubic feet of gas may have not been discovered, and 35 trillion cubic feet of unconventional reserves may have not been found.

So far, over 29 billion barrels of oil have been extracted from the Permian since 1921, and signs of production are still going strong. The Basin accounts for 57 percent of all Texas oil production and 25 percent of all U.S. oil production.

Rigs in the Permian increased 339 percent since 2009.

And we hear a lot about Texas, but there is just as much energy growth in New Mexico. Within the last three years, oil production increased 50 percent in New Mexico.

If you’re looking for other signs of growth, look at permits.

West Texas and New Mexico started with 4,435 drilling permits in 2005, which shot to 9,335 in 2012, according to data from the Texas Railroad Commission. Oil production in the Permian went from 253 million barrels in 2005 to 312 million in 2012.

Total oil production in the Permian Basin reached 886,115 bpd from January to May of 2013. In 2012, it was 901,119 bpd.

What Makes the Permian Basin So Special?

While the Eagle Ford has a thickness of 25 to 30 feet and the Bakken is 10 to 25 feet thick, the Permian Basin encompasses the Cline Shale, which is estimated to be 200 to 550 feet in thickness!

If there’s anywhere you want to park your investment dollars for the long-haul, it would be the Permian Basin.

The Bakken has the relatively undiscovered Three Forks formation, but the Cline Shale is just the beginning.

It lies just 1.8 miles below the Permian Basin, and it will definitely prove to be a source of long-term investment in the future. It could contain as much as 30 billion barrels of recoverable oil.

West Texas is an oil behemoth with the equivalent of 10 Eagle Fords and 17 Bakkens!

Eagle Ford has only gained steam since 2008, at first starting with just 352 barrels of oil production per day. The Bakken started small in the 1950s, but it has slowly gained traction as the decades passed.

But the Permian Basin production has a long history that stretches back to the 1920s and shows no sign of waning. The Permian has been crucial in fueling the war machine during World War II, and it also played a pivotal role in America’s booming auto industry post-1945.

But the Permian is not just about oil; you’ll find energy companies of all strides looking for natural gas, natural gas liquids (NGLs), and crude.

Companies in Permian Basin

Big oil companies like Chevron (NYSE: CVX), Exxon Mobil (NYSE: XOM), and Royal Dutch Shell (NYSE: RDS-A) aren’t the best-performing producers anymore, having failed to catch onto the shale oil frenzy as smaller companies have done and banking too much on natural gas.

But Exxon Mobil has been a major player in the region – testing liquids and drilling 5 new rigs in 2012.

Chevron has recently acquired a deal in the Permian with a smaller company, paying $60 million for a 50 percent stake in gas-gathering and drilling wells. Chevron has vast acreage in the Permian Basin and also acquired an additional 264,000 acres from financially vulnerable Chesapeake Energy (NYSE: CHK).

The top three producing fields you want to watch out for are Wasson, Yates, and Kelly-Snyder. These are the top grossing fields in Permian history as of March 2013.

North Dakota and Texas are the backbone of the U.S. shale boom, and other states may need to jump in to maintain record production numbers. But the Permian basin will be one place that will carry forward not only the Texas oil economy but the entire country. So keep your eyes open for smaller companies and any future activity surrounding Cline Shale.


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