Following a plethora of jumps and drops, the price of crude oil rose an impressive 45% last year. With OPEC’s first production cut in years, a pro-energy administration entering the White House and very few new oil discoveries amid increasing demand, the commodity has since stabilized within a range above $50 per barrel.
While it’s hard to predict whether oil will soar again and energy will outperform all other sectors this year, there’s reason to believe that 2017 could be an excellent one for oil stocks.
One oil-producing region that continues to attract investors is the low-cost Permian Basin – spread over west Texas and New Mexico. According to some estimates, the region – that has been churning out crude continuously for nearly 100 years – has produced in excess of 30 billion barrels of oil since output began in 1921.
Incredibly, despite that impressive output history, analysts maintain that its best days have yet to come. In fact, the Permian Basin is key to the studies that say U.S. has now overtaken industry giants Saudi Arabia and Russia in recoverable oil reserves.
Permian Basin: Hot Area for Producers
A sedimentary basin lying underneath the western part of Texas and the south-eastern part of New Mexico, the Permian Basin Shale covers roughly 75,000 square miles, almost half the size of California.
Experts say that it’s cheaper to drill and complete oil wells in the Permian Basin than most other major fields. Moreover, there are certain parts of the shale play whose well-returns are the best in the U.S. With crude prices still down significantly from their 2014 levels, well returns have become a very important metric to gauge profitability.
Permian’s attractive economics means that producers can still make money there at the current, just over-$50-a-barrel price. This is mainly because of the region’s extensive pipeline infrastructure, plentiful labor and supplies, and relatively warm winters that makes year-round work possible. Most other domestic shale regions need prices above $60 to support new developments and expansions.
As a result, the Permian currently constitutes a lion’s share of the industry’s recovery. In 2016, more than a third of the total amount spent on all U.S. deals was spent on Permian land purchases and leases. No other major oil region in the country came close to this activity.
Permian Deals Galore
Last month, Exxon Mobil Corporation (XOM) announced its intention to more than double its Permian Basin resource of 6 billion barrels of oil equivalent. The company aims to achieve this through the buyout of companies owned by the Bass family of Fort Worth, TX. Alongside an upfront payment of $5.6 billion, Exxon Mobil will make a series of additional contingent cash payments of up to $1 billion. (Read: Exxon Mobil to Buy Bass Family Assets, Double Permian Yield.)
Also, Noble Energy, Inc. (NBL) entered into a definitive agreement to acquire Clayton Williams Energy, Inc. (CWEI) in a bid to expand its footprint in the Permian Basin. The transaction is worth $3.2 billion, post Noble Energy’s assumption of Clayton Williams’ net debt of $500 million. (Read: Noble Energy to Acquire Clayton Williams for $3.2B.)
Earlier this week, Parsley Energy Inc (PE) entered into an agreement with Double Eagle Energy Permian, LLC to acquire certain assets in the oil-rich Permian basin for $2.8 billion. (Read: Parsley Inks Permian Acquisition Deal, Updates Guidance.)
According to analysts, deals of this nature could push up the value of the group as a whole. With its relatively low break even cost, the Permian Basin is likely to attract more transactions of this nature in the near future. Also, with their new-found confidence, companies could soon be venturing into other oil rich areas. The new administration has already indicated that it would likely review regulations limiting drilling activities in Alaska and in other parts of the U.S.
Meanwhile, late last year, the U.S. Geological Survey (USGS) announced that it has discovered the biggest deposit of untapped oil in the U.S., located in the Wolfcamp shale formation in the Midland Basin portion of Permian Basin. (Read: USGS Just Discovered the Biggest Shale Oil Field in America.)
5 Permian Basin Oil Stocks to Buy
With the hectic pace of land grab set to continue in the Permian basin and investor’s strong appetite for stocks focused in that region, we have shortlisted 5 companies that might fetch you outstanding returns. Each of our picks boast of a Zacks Rank #2 (Buy), which justifies a company’s strong fundamentals.
Founded in 1954, Houston, TX-based Apache Corporation (APA) is one of the world’s leading independent energy companies engaged in the exploration, development and production of natural gas, crude oil and natural gas liquids. In particular, Apache’s recent Alpine High discovery in Delaware sub-basin, a section of the Permian, is expected to be a gamechanger for the company. Estimated to hold massive oil and natural gas reserves, the wells are said to have strong economics and top-tier returns.
Second on the list of interesting opportunities in the Permian Basin is Pioneer Natural Resources (PXD). An independent oil and gas exploration and production company based in Irving, TX, Pioneer’s growth continues to be focused on the Permian operations. Its world-class assets in the region is likely to see year-over-year production growth between 30% to 34% in 2017.
Denver, CO-based Resolute Energy Corp (REN) is another independent oil and gas finder in the U.S. with primary focus on its Permian Basin properties. Divided into the Appaloosa and Mustang project areas in Reeves County in the Delaware Basin, Resolute Energy’s Permian Basin drilling program continue to deliver compelling results. Third quarter production from the properties jumped more than 100% year-over-year, contributing meaningfully to cash flows.
Our fourth choice is Cimarex Energy Co (XEC), an energy explorer with its exploration and production activities taking place primarily in two areas: the Permian Basin and the Mid-Continent region. The Denver, CO-headquartered entity invests around 60% of its exploration and development expenses in the Permian region and hopes to see first production from five wells in early 2017.
Finally, we have Tulsa, OK-based independent oil and gas operator WPX Energy Inc (WPX). Shifting its portfolio from Colorado’s Piceance Basin to Permian’s Delaware basin, the company plans to drill about 75 wells this year. WPX Energy entered the Permian Basin in 2015 following the $2.75 billion acquisition of privately held RKI Exploration, gaining 92,000 net acres in the prolific play. Importantly, the company’s acreage acquisition cost at that time was much lower than current levels, providing further impetus to its returns.
Zacks’ Top 10 Stocks for 2017
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