A wider Midland to Cushing oil discount: The effect on the market

Part 3
A wider Midland to Cushing oil discount: The effect on the market (Part 3 of 5)

Pioneer and Concho have significant oil assets in the Permian

Major upstream oil producers in the Permian Basin include Pioneer Natural Resources (PXD), Laredo Petroleum (LPI), Concho Resources (CXO), and Occidental Petroleum Corporation (OXY). Some of these are part of XLE holdings, the Energy Select Sector SPDR ETF.

3. Permian reserveEnlarge GraphThe Permian Basin in West Texas and New Mexico has produced significant quantities of crude since the 1920’s. In recent years oil production in the U.S. has been enhanced by advanced recovery techniques including the application of horizontal drilling and hydraulic fracturing. Production has increased by over 400 Mb/d since the start of 2012 and is expected to increase another 500 Mb/d by the end of the decade. The concern, however, has emanated from tight pipeline capacity to supply crude from producers to the refineries and the market. Competition for space on the pipelines out of the region has led to producers sometimes having to accept large discounts for their crude.

We will discuss in brief, several upstream names with significant assets in the Permian which could be affected by a wider WTI Midland to WTI Cushing spread. Note that most companies operating in the region expect to continue to grow production there over the next few years.

Growth in Permian production is expected to continue over the next few years. Concho Resources (CXO), a big oil producer in Permian Basin, has grown production by more than 20% over the 2012, having produced 231.50 thousands barrel of oil per day in 2013 as compared to 184.2 thousands barrel of oil per day in 2012. CXO’s assets are almost exclusively in the Permian. In the next three years, the company expects to double production. The company also expects to increase horizontal activity in the Midland Basin over the course of next three-year plan.

Pioneer Natural Resources (PXD) increased its horizontal Spraberry/Wolfcamp shale production in Permian Basin by six thousands barrel of oil equivalents per day during 4Q13 from 3Q13. In 2013, the company’s total production from continuing operations was 58.9 million barrels of oil, excluding field fuel usage, which a 12% higher over production from continuing operations during 2012. Net production in Spraberry/Wolfcamp region increased from 66 thousands barrel per day in 2012 to 79 thousands barrel per day in 2013; and is expected to increase to a range of 95–100 thousands barrel per day. In 2014, the company has plans for drilling 115 wells compared to 100 drilling wells in 2013. The company’s 2014 drilling programs focus on higher return areas in Northern Upton and Reagan counties.

Laredo (LPI) engages in exploration, development, and acquisition of oil and natural gas properties primarily in the Permian region of the U.S. In 2013, it had 202,084 net acres in the Permian Basin and had total 203.61 million barrels of oil equivalent of proved reserves. It is expected that the company’s Permian-Garden City acreage will be the primary driver of reserves and production in future with an estimated area of 360,000 net acres under the wing, or ~88% of total wells in that area, for commercial horizontal development based on 96 horizontal wells drilled and completed by 2013. LPI’s wholly-owned subsidiary, Laredo Midstream, has more than 125 miles of pipeline in our natural gas gathering systems in the Permian Basin as of December 31, 2013. In 2013, the company completed 40 horizontal wells in the Upper Wolfcamp, 13 horizontal wells in the Middle Wolfcamp and six horizontal wells in the Lower Wolfcamp—all in Permian Basin.

Occidental Petroleum’s (OXY) growth plan is primarily anchored by horizontal drilling in the Spraberry/Wolfcamp oil field. The share of the company’s production in the Permian Basin was approximately 212 thousands barrel per day in 2013. Occidental Petroleum (OXY) began transitioning to a horizontal drilling program to take advantage of unconventional and shale opportunities. In the Permian Basin, Occidental spent over $1.7 billion of capital in 2013 with 64% spent on Permian Resources assets. In 2014, Permian Basin capital spending is expected to be slightly less than $2.2 billion. OXY holds approximately 1.9 million net acres at the end of 2013. In 2013, OXY drilled 49 horizontal wells and expects this to increase in 2014 to approximately 172 of its 345 total planned wells. The company employs a technology which is combination of CO2 and waterfloods for oil production in this region.

The Realist Discussions