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Market Realist – By Keisha Bandz – Dec 14, 2017 | 9:48 AM

Drilling and completion costs

According to IHS Markit, there will be a 10% increase in the cost index for the Permian region by the end of 2017 (the base year is assumed to be 2000).

Drilling costs in the Permian region are expected to increase 6.7% in 2017. The increase will be driven by costs related to land rigs and cementing.

Operating expenses in the Permian region are expected to increase 2.7% in 2017. That will probably be driven mainly by transportation costs.

Apache (APA), Concho Resources (CXO), and Pioneer Resources (PXD) are key upstream players in the Permian region. Integrated companies with Permian exposure include Chevron (CVX) and ExxonMobil (XOM).

Market Realist – By Keisha Bandz – 9 hours ago

Increase in costs

According to a report by IHS Markit released in June 2017, the Permian Basin will see increasing costs next year, mainly driven by completion costs and logistics- and supply-related costs. Read Part 6 of this series to find out more.

Potential increase in break-even prices

In the above chart, we see that constraints such as rail transportation, labor challenges, and water constraints could push the break-even prices for the Delaware and Midland Basins. The chart is based on the average breakeven for wells in the Wolfcamp Midland and Wolfcamp Delaware in 2016. According to IHS Markit, these short-intermediate constraints could push break-even prices for the Wolfcamp Midland beyond $49 per barrel and beyond $41 per barrel in the Wolfcamp Delaware.

Parsley Energy (PE) holds both Wolfcamp Midland and Wolfcamp Delaware positions. The company was very active this year, acquiring acreage positions mostly in the Midland Basin. To know more, be sure to read PE Announced 2nd Permian Acquisition in Less than a Month.

Market Realist – By Keisha Bandz – Dec 14, 2017 | 9:49 AM

Midstream takeaway capacity

As we’ve already seen in this series, the Permian Basin boasts higher productivity and lower costs. The basin’s output could thus keep rising as producers keep drilling. See Part 2 of this series to read about the EIA’s (U.S. Energy Information Administration) forecasts for Permian production growth trends. As production increases, pipeline capacity could become more crucial.

Key projects and expansions

Several pipelines have come online to accommodate rising Permian production in recent years, including the BridgeTex pipeline, a 50-50 joint venture of Magellan Midstream Partners (MMP) and Plains All American Pipeline (PAA). Earlier this year, the pipeline expanded from a capacity of 300,000 bpd (barrels per day) to 400,000 bpd. Driven by customer demand, BridgeTex may further expand the capacity to 440,000 bpd.

Plains All American Pipeline recently announced an open season for crude oil transportation from the Permian Basin to the Corpus Christi pipeline. That could potentially add 575,000 barrels per day of Permian Basin pipeline takeaway capacity. Magellan Midstream Partners also recently announced an open season to develop a new pipeline that would transport crude oil from the Permian and Eagle Ford Basins to multiple destinations in Corpus Christi and Houston.

EPIC Pipeline Company has announced an open season to gauge interest for crude oil and condensate transportation from the Permian Basin to Corpus Christi, Texas. The EPIC Pipeline is expected to have a capacity to deliver 550,000 barrels per day. It’s expected to be operational by 2019.

In addition to higher productivity and lower costs, increasing takeaway capacity could thus cause Permian producers to find even more incentives to drill in the Permian Basin.

In the following part, we’ll look at forecasts for Permian investments in the coming years.

Market Realist – By Keisha Bandz – Dec 14, 2017 | 9:49 AM

Permian cash flows

With the increase in capital expenditure and production, cash flows in the Permian Basin are also expected to rise by 2021. Cash flows in Wolfcamp Delaware are forecast to exceed $8 billion by 2021. In Wolfcamp Midland, cash flows are expected to exceed $4 billion by 2021.

We’ve already looked at trends in Permian costs and productivity in the previous parts of this series.

Hedging activity in the Permian

According to an IHS Markit report released in July 2017, key oil-weighted producers operating in the Permian region had 65% of their remaining oil production hedged at an average price of $50 per barrel. That compares with just 19% of oil production hedged in 2017 by non-Permian oil-weighted peers.

For 2018, Permian producers have hedged 25% of oil production, while non-Permian exploration and production companies are largely unhedged for oil.

According to IHS Markit, Concho Resources (CXO), Parsley Energy (PE), and Laredo Petroleum (LPI) are key Permian producers with the best downside protections. Even if prices were to fall to $35 per barrel, they have hedged prices above $50 per barrel in 2017 and 2018.

Market Realist – By Keisha Bandz – Dec 14, 2017 | 9:49 AM

The EIA forecast for crude oil production

The EIA (U.S. Energy Information Administration) forecasts that US crude oil production will average 9.2 million barrels per day in 2017. In 2018, US crude oil production is expected to average 9.9 million barrels per day.

The EIA’s November STEO (short-term energy outlook) report noted that WTI (West Texas Intermediate) crude oil would average $49.70 in 2017 and $51.04 in 2018. In the above chart, we see the range of possible WTI crude oil prices that are forecast by the EIA for 2017 and 2018.

The fate of crude oil prices is heavily linked to oil-weighted producers such as Apache (APA), Continental Resources (CLR), and Concho Resources (CXO).

In the next part of this series, we’ll look at some key Permian exploration and production stocks.

Market Realist – By Keisha Bandz – Dec 14, 2017 | 9:50 AM

Permian companies’ stock performances

In this part of the series, we’ll look at the YTD (year-to-date) stock performances of major Permian E&P (exploration and production) players. We’ll look at Apache (APA), Pioneer Natural Resources (PXD), Concho Resources (CXO), Chevron (CVX), Cimarex Energy (XEC), ExxonMobil (XOM), Parsley Energy (PE), and Occidental Petroleum (OXY). We’ll also compare their performances to the broader energy sector ETF (XLE) as well as the broader market (SPY) (SPX-INDEX).

The above chart shows that Chevron and Concho Resources have seen similar returns since January 2017, at 1.5% and 2.1%, respectively. However, they both have underperformed crude oil prices, which have risen ~9.2% since the beginning of the year.

They outperformed the Energy Select Sector SPDR ETF (XLE), which returned -8.6% in the same period. The outperformer was the S&P 500 SPDR ETF (SPY) (SPY-INDEX), which rose ~18% since the beginning of the year.

Apache and Parsley Energy have underperformed their peers as well as XLE and SPY. They returned -38% and -25%, respectively, since the beginning of the year.

To know more about Apache, read The Latest on Alpine High: Behind APA’s Strategic Goals.

Market Realist – By Keisha Bandz – Dec 14, 2017 | 9:50 AM

Permian capex

According to a report released by IHS Markit, Permian investments are expected to increase from $8 billion in 2016 to more than $41 billion in 2021. That represents a CAGR (compound annual growth rate) of 38%. In comparison, investments in the lower 48 onshore are expected to grow at a CAGR of 27%.

For 2018, Chevron’s (CVX) forecast capex in the Permian is expected to be $3.3 billion compared to $2.5 billion in 2017.

Will rising costs be offset by productivity?

However, according to IHS Markit, despite the economic attractiveness of the Permian Basin, in 2017, rising service sector costs will rise per-well capex by more than 15%. Rising costs could also put pressure on break-even prices. To know more, read Part 7 of this series.

That being said, IHS Markit believes that rising costs will likely be offset by increased productivity, especially in the early-life Permian plays. Increasing crude oil prices could also benefit Permian producers.