Must-know: Which has the most potential—Permian, Williston, or Eagle Ford?

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Jun. 3 2014, Updated 9:00 a.m. ET

The midstream energy sector

The midstream energy sector has witnessed increasing capital investment toward oil and gas infrastructure assets—capex increased by 60% from $56.3 billion in 2010 to $89.6 billion in 2013. The key objectives of the huge investments in midstream infrastructure include a structural shift from import- to export-oriented infrastructure driven by liquefied natural gas (or LNG) assets and a surge in oil and gas transportation and storage infrastructure. Pipelines and related investments will remain the major transporter of oil and gas despite the current use of rail and marine as the other competitive modes of oil and gas production transportation.

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The Eagle Ford is one of the fastest growing areas of oil production in the U.S., with most market participants expecting further rapid growth over the next several years. Midstream companies (such as PAA, EPD, KMP, and APL) with assets and growth opportunities in the area are well positioned to benefit from the production growth. The play covers a large area of ~50 miles wide and ~400 miles long across south Texas. It has been one of the largest engines of growth for U.S. oil production over the past several years.

According to data supplied by Bentek Energy, a unit of Platts, production of crude oil in the Eagle Ford increased by 55% in 2013 to 1.2 million barrels per day from 772,000 barrels per day in 2012. In 2012 and 2011, the average daily growth rate of production was 93% and 224%, respectively.

The Williston Basin is a large sedimentary basin spread within eastern Montana, western North Dakota, and South Dakota. The area extends approximately 475 miles north-south and 300 miles east-west. The production from the Bakken shale and Three Forks plays is expected to make the Williston Basin one of the fastest growing crude oil basins in the world. In the Williston Basin, crude production was 405,000 barrels per day in December, 2010. It went up to 595,000 barrels per day in December, 2011 and 840,000 barrels per day  in December, 2012. By December, 2013, it increased 27% to 1.067 million barrels per day in December, 2013.

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The Permian Basin extends beneath an area approximately 250 miles (400 km) wide and 300 miles (480 km) long. Geographically, the area is situated between the western part of Texas and the southeastern part of New Mexico. The Permian Basin is made up of three components: the eastern Midland Basin, the Central Basin Platform, and the western Delaware Basin. In 2010, crude oil production in the Permian Basin was 967,000 barrels per day in December, 2010, which increased to ~1.1 million barrels per day in December, 2011. It increased by 17% to 1.27 million barrels per day in December, 2012 before rising 15% to 1.4 million barrels per day in December, 2013. Historical production from the Permian Basin has totaled roughly 29 billion barrels of oil and 75 billion cubic feet of gas, or roughly 70% oil by energy content. The oil content of the Permian Basin, in conjunction with the improvement of recent technology, has made the Permian Basin a hot play. Activity there has escalated rapidly over the past few years.

Rig count is one way to measure the potential for oil and gas production growth in a region. Not only have rig counts increased, but the composition of horizontal versus vertical rigs has also changed recently. As lately as 2011, 96% of rigs in the Spraberry and Wolfcamp drilling regions of the Permian Basin were vertical rigs—as compared to 77% in May, 2013. The prevalence of horizontal drilling has grown because wells are more expensive upfront, but generally speaking, horizontal wells generate greater hydrocarbon production, which makes the increased initial cost worth it.

The midstream oil companies that engage in the transport and logistics of crude oil have been very active for the past five years, as a result of increasing production in the U.S. The master limited partnerships in the midstream space that have benefited the most from the shale oil boom are Enterprise Products Partners L.P. (EPD), Genesis Energy L.P. (GEL), Targa Resources Partners (NGLS), and Plains All American Partners (PAA). These are components of the Alerian MLP ETF (AMLP) and the Global X MLP ETF (MLPA).

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