Study: Permian’s economics will help weather downturn

Posted on July 14, 2020

By Mella McEwenMRT.com/Midland Reporter-Telegram

There is no question operators active in the Permian Basin are facing a difficult economic environment. But a recent report by Mercer Capital finds the nation’s most prolific basin should fare better than other producing regions because of its economics.

The Permian is still one of the focus areas for supermajors Exxon-Mobil and Chevron and well-capitalized independents such as Concho Resources, Diamondback Energy, Parsley Energy and Pioneer Natural Resources, saidAlex Barry, vice president at Mercer Capital.

As the industry weathers the current economic downturn, “I think you will see some consolidation of companies in the basin, but probably less than people think, and certainly less than is warranted,” Barry told the Reporter-Telegram by email. “A lot of management teams don’t want to give up their jobs if they don’t have to do so. Drilling activity has declined, and activity going forward will be focused on the most economic areas.”

He said the Permian Basin rig count as of June 26 was down 70 percent from the previous year. While significant, he said the decline was less severe than reductions seen in the Bakken – 82 percent – and the Eagle Ford, 85 percent. Barry said this may be the bottom of the rig count decline, as companies begin to bring production back online.

He said, “significantly lower exploration and production capital expenditure budgets will likely keep a lid on the rig count in the near term.”

Asked about the impact on energy supplies as production in the Permian slows, he said, “The Permian has a tremendous amount of resource in the ground, so this isn’t as much of a supply issue as it is a demand issue. Once demand pushes commodity prices to levels where further development makes sense, you’ll see a pickup in production.”

Barry said the Permian is seeing gains in new well production per rig, up 2 percent year-over-year through June. This compares to a decline of 42 percent in the Bakken and gains of 12 percent in the Eagle Ford and 6 percent in Appalachia. He said this signals the increasing efficiency of operators in the area. He also pointed out that the decline in the Bakken is because of significant production curtailments in the basin. The Energy Information Administration forecasts a normalization in July.

All operators active in the Permian analyzed by Mercer had year-over-year stock price declines. Pioneer and Parsley were the best performers, down 37 percent and 44 percent respectively. Concho’s stock, while down 50 percent, still outperformed the broader E&P index, which is down 52 percent. Centennial Resource Producing suffered the worst performance, down 88 percent year-over-year, though its stock has rebounded significantly since its low in early April, he said.

Already, two Permian operators – Sable Permian and Lilis Energy – have filed for bankruptcy, and Barry said more Permian bankruptcies are likely coming.

Looking ahead to a more normal operating environment, Barry said, “Companies need to thoughtfully assess what, if any, activity makes sense now. While commodity prices are up significantly from recent lows, they are still lower than what most companies need to profitably drill new wells.”

 

https://www.mrt.com/business/oil/article/Study-Permian-s-economics-will-help-weather-15402288.php