North American shale – Permian

North American shale – Permian
anita_starzycka / Pixabay

Acreage in the Permian Basin of West Texas and New Mexico may be expensive, but it is worth every penny. “The Permian deserves every ounce of investor love,” said Mike Kelly, managing director and senior analyst at Seaport Global Securities LLC. Kelly said that his energy research and analysis team ranks the companies it follows every quarter and for the past several quarters, 8 out of the top 10 companies have been linked to the Permian. Oil and gas development there provides high returns and high growth for the exploration and production companies that invest there.


Although public entities and private equity-backed teams have flocked to the Permian for the past eight months for several reasons, Kelly believes there are two that drive dollars to the play. Within the Permian Basin there are multizones that can all deliver excellent returns. This year, work will be done by operators in the area to prove out that some zones can produce wells that offer 3 million barrels EURs (estimated oil recoveries). Wall Street is following that work closely, Kelly said, to ensure that all the money spent and the deals that went down in the past 8 months were worth it. For Kelly and his team, internal projects show that investment into Permian acreage that seems high now may actually seem cheap in the future.

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For a 750 mboe well, the price per acre is roughly $32,000. For a 1,000 mboe well, the price per acre is $54,000. But, with the prove-out period of multizones continuing this year and the evolution of enhanced completions, acreage in the play could someday reach $223,000 per acre. “If things play out in the Permian, you can justify paying a lot more than you are paying today,” Kelly said.

Bill Markos, managing director of Jeffries LLC, also shared the sentiment of Kelly regarding the Permian. During his presentation at Hart Energy’s DUG Permian 2017 event held this week in Fort Worth, Texas, Markos said the Permian is currently at the center of the oil and gas universe. For every one mile section of land there, he explained, there is roughly one mile deep of oil. The work being done there to enhance completions and bring more oil out of the ground per well is only in the second or third inning of development, he added.

The prospects in the Permian also look bright due to what he believes will happen in the global oil market. With financial markets strong, oil demand rising and oil supply heading down, the Permian will only get bigger. “Any worldwide company should seriously think about investing in the Permian,” he said. The days of mega oil projects performed offshore or across major conventional fields are over for now as many major entities look for shorter cycle returns on investment that can be achieved in West Texas. Because of the offerings present in the Permian, deals in the 200,000 acre range once considered the norm in shale plays will be harder to come by. Now, 5,000 to 10,000 acre deals will be considered the norm.

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Todd Sullivan is a Massachusetts-based value investor and a General Partner in Rand Strategic Partners. He looks for investments he believes are selling for a discount to their intrinsic value given their current situation and future prospects. He holds them until that value is realized or the fundamentals change in a way that no longer support his thesis. His blog features his various ideas and commentary and he updates readers on their progress in a timely fashion. His commentary has been seen in the online versions of the Wall St. Journal, New York Times, CNN Money, Business Week, Crain’s NY, Kiplingers and other publications. He has also appeared on Fox Business News & Fox News and is a contributor. His commentary on Starbucks during 2008 was recently quoted by its Founder Howard Schultz in his recent book “Onward”. In 2011 he was asked to present an investment idea at Bill Ackman’s “Harbor Investment Conference”.

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