Is the Permian Still Sizzling?
Should producers be worried?
As we discussed in Parts 1 and 2 of this series, the Permian Basin has been seeing increasing production and rising rig counts. The Permian’s impressive production profile, which includes its low break-even costs and its high IRRs (internal rates of return), have driven the frenzied M&A (mergers and acquisitions) activity that we’ve seen in the region all year.
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Given the rising production in the US, oil prices are bound to go down, and such a fall will likely affect the economics of all the basins—including the Permian. But increasing M&A activity has pushed producers to pay a premium to get their piece of the Permian cake. It will eventually come down to producers weighing higher acquisition costs and lower oil prices.
The Permian has seen higher IRRs, even at lower oil prices, as compared to basins like the Eagle Ford and the Bakken. This could be one of the reasons why Hess (HES) recently announced that it would be selling some of its interests in the Permian.
The expensive Permian tag may lead some producers to test the waters and expand in other plays like the Eagle Ford—as Sanchez Energy (SN) has already done. On January 12, 2017, Anadarko Petroleum (APC) announced the sale of its Eagle Ford assets to Sanchez Energy (SN) and Blackstone Group for a total of ~$2.3 billion. Sanchez Energy noted that the transaction increased its total net proved reserves to ~340 MMboe (million barrels of oil equivalent), or 78% higher than its reserves at the end of 2016.
Two more companies that have identified the Eagle Ford Shale as a “key growth driver” in 2017 are Chesapeake Energy (CHK) and Cabot Oil & Gas (COG). Both natural gas-weighted companies have forecast significant oil growth in 2017—most coming from the Eagle Ford.