It looks like I may have to hitchhike again when I go on my next trip to Midland, Texas to meet with some of the Permian companies that we hold in our portfolios. On my first visit there about six years ago, I wasn’t able to find a cab to take me from the airport to my hotel – but excitement and activity were at a fever pitch in the area at that time. Horizontal drilling technology was just migrating to the basin and the price of oil was around $90, making everything very economical to drill. This feeling has finally returned in the Permian Basin even though the oil price band is now around $40-50. There has been a frenzy of M&A recently which highlights the attractiveness of the play. The acreage metric has gone from $15,000-20,000 per acre when oil was round $90 to the mid $20,000-30,000 ranges, with QEP paying close to $60,000 per acre recently.
There are three compelling reasons why the Permian has attracted so much interest:
1) The economical return profile of some Permian play is now down to the low $40s per barrel.
2) Relative to the other oil basins like the Bakken and Eagle Ford, it is still early in the development. There is still a lot of opportunity for improvement driven by technology (i.e. completion techniques), efficiency (i.e. long laterals, pad drilling, driving resource per dollar spent up) and an expanding resource (tighter well spacing).
3) Multi-zones/formations. Most other oil plays have two to four geological formations, but in the Permian there are four to six, maybe even 12 zones in some parts. The implication for this is that you could have more than 20 wells per section (QEP is assuming 29 wells / section.) Not only does this increase inventory visibility but it also decreases the infrastructure capital that is required.
We continue to believe opportunities for further consolidation remain robust. The basin remains fragmented and it will crowd out other high cost oil production options such as the oil sands, deep water, and peripheral acreage in the Bakken, Eagle Ford and many other onshore assets.
Signature funds are well positioned to benefit from this red hot basin. Across the funds, we own a number of companies with core Permian acreages such as Concho, Encana, Devon, Diamondback, Chevron, EOG, Pioneer and Cimarex. As evidence of our collaborative work with the High Yield Team on the Permian, Signature is the largest bondholder of Endeavor, one of the biggest private Permian players.