The last two years have been a challenging period for the domestic exploration and production industry, as the global price for crude oil collapsed and has been slow to recover. But as the price has recovered a bit, from a February low of about $27 up into the mid-$40s – and as increased efficiencies continue to drive down the cost of production – the drilling rig count here in the U.S. has begun to move upwards, with net rigs having now been added in 9 of the past 10 weeks.
That growth in the rig count has been pronounced in one giant play: the Permian Basin, which underlies a broad swath of West Texas and the Southeastern portion of New Mexico. Having added 35 new rigs since June, the most recent count had the Permian home to 189 active rigs, almost 40 percent of all active land rigs in the U.S. Of the major, world-class U.S. oil and gas plays, only the STACK and SCOOP plays in Oklahoma have seen similar recent percentage increases in rig counts.
The Permian region has become so hot in recent months that acquisition prices for undeveloped leases there have begun to rapidly ramp up. One independent producer, SM Energy, recently paid the equivalent of more than $39,000 per acre for drilling rights on 24,783 Permian acres, in an acquisition that also included a significant amount of existing production. That’s similar to prices that were being paid in the Eagle Ford Shale play a few years back, but that was in a $90 price environment. That such prices are being commanded in a $40-$50 price environment show how attractive the Permian has become.
This enthusiasm for the Permian really isn’t just something that has developed in the last few months. Two years ago, Parsley Energy, led by 38 year-old CEO Bryan Sheffield, was able to raise $925 million in what became one of the largest IPO offerings in the history of the industry thanks to an asset base consisting mainly of prime Permian acreage. According to the Wall Street Journal, Sheffield has now become one of America’s youngest billionaires as a result.
The escalating acquisition cost is indicative of a growing sense of optimism among Permian producers that this basin is the near-term future of oil and gas industry growth opportunity. With multiple, often stacked pay zones, a major centrally-located industry hub in Midland, easy access to both land and air travel and a break-even price for shale wells as low as $40/bbl, the growth potential for the Permian seems almost limitless.
The area also benefits from older conventional plays that have been under development for decades, but continue to see production enhancements due to secondary and tertiary recovery projects and advanced stimulation technologies. Many smart operators have long been able to show that these plays are like the proverbial gift that keeps on giving.
Brian Bradshaw, co-CIO at a hedge fund founded by T. Boone Pickens, is quoted by the Wall Street Journal as saying that “We don’t see a world in which you can balance the supply equation without the Permian. The world has to have their oil.” Bradshaw’s hedge fund has unsurprisingly loaded up on shares of Permian producers, including Parsley and Pioneer Resources.
This nascent renaissance in the industry’s fortunes in the Permian could not come at a more opportune time for the State of Texas. Texas State Comptroller Glenn Hegar recently stated that “If we look at the next budget, it is going to be significantly tighter, from a variety of standpoints.” Indeed, there is a general feeling in Austin that the Texas Legislature will be facing a significant budgetary shortfall when it convenes next January.
Obviously, the dramatic drop-off in oil and gas activity as the oil price collapsed over the last two years is a major driver of this changing budgetary environment, just as it had played a major role of helping the state run multi-billion dollar budget surpluses over the previous three years. But a rising rig count will mean more jobs, more economic activity and higher tax revenues for the state.
Texas government has also been wise in that, for the last 30-plus years it has maintained a Rainy Day Fund that is financed almost solely by severance taxes on oil and natural gas. Thus, whenever the industry has boomed, the balance in that fund has risen dramatically, leaving funds to help cover any shortfalls that take place when the industry moves into down times. With the Rainy Day Fund currently sitting at a near-record level, Texas is well-positioned to move into the next two fiscal years with a balanced budget that continues to provide essential services to its citizens.
The Permian Basin has been a major player in the financial fortunes of Texas for almost a century now, since the completion of the first commercial oil well in the Westbrook Field in 1921. Since that time it has helped Texas build out the most extensive road system in America, paid for health, education and other essential state services, provided billions of dollars in ad valorem taxes to local governments, and played a major role in funding the state’s Permanent University Fund, which subsidizes the educations of hundreds of thousands of students every year in both The University of Texas and Texas A&M University systems.
If recent developments in the basin are any indication, the mighty Permian will continue to play this most critical role for Texas and Texans for many decades to come.
God Bless Texas.