The Permian is getting pricey
Deal-makers say process becoming more challenging
“The availability of land is diminishing every day. Everyone wants to be there. Nothing out there is cheap anymore.” Garrett Martin, Double Eagle’s senior vice president of engineering in Fort Worth
A few months ago, a small Fort Worth driller sold off tens of thousands of acres it had cobbled together in West Texas, earning $2.8 billion for drilling wells during the worst oil bust in a generation.
Now, armed with a $400 million private equity investment, Double Eagle Energy Permian wants to build another foothold in the world’s hottest oil field and start drilling there early next year. But this time, buying and flipping gushing oil land in the Permian Basin is going to be much more difficult and expensive.
“The availability of land is diminishing every day,” said Garrett Martin, Double Eagle’s senior vice president of engineering in Fort Worth. “Everyone wants to be there. Nothing out there is cheap anymore.”
Over the past few months, the pace of transactions in the Permian Basin has slowed dramatically through a combination of low oil prices and the oil industry’s buying spree in West Texas earlier this year, which consolidated large swaths of land and left behind a much smaller amount of contiguous acreage suitable for modern drilling. The rush of geologists and drilling rigs into the world’s hottest oil play will make it far more difficult and costly to invest in oil fields
in West Texas, a region investors and executives still believe could provide huge returns to wildcatters, oil industry professionals said at this summer’s NAPE, a semiannual gathering of energy dealmakers at the George R. Brown Convention Center in downtown Houston.
More than 2,800 people walked the convention halls during the two-day event this week, networking and seeking land against the backdrop of colorful displays and maps of oil fields in West Texas, Oklahoma, North Dakota and Pennsylvania.
Attendance increased slightly compared with last summer’sexpo.
In the second quarter, the number of land deals in West Texas fell by one-third to 30, and the combined value of those Permian Basin acquisitions sank 85 percent to $2.8 billion after a flurry of giant multibillion-dollar transactions in the first three months of the year.
“It’s going to be piecemeal,” said Allen Gilmer, executive chairman of the consultancy Drillinginfo in Austin. “It’s going to be harder to make the bigger deals.”
For some recent acquisitions, Permian Basin land prices still topped $30,000 an acre and $50,000 an acre, a dramatic increase from prices years ago, according to the Houston consultancy Petroleum Listing Service. It is possible those large, pricey deals could slow if investors find returns aren’t what they anticipated, oil executives said.
“We’re seeing capital chasing deals, but it’s going be years before we find out what the economics look like,” said Josh Lorenz, chief operating officer of EnCore Permian, a 6- monthold Midland driller with $200 million in privatewhether we’ re seeing a business that’s getting traded on asset value, not on cash flow. That definitely feels like a bubble.”
Among the challenges is finding broad swaths of land that will accommodate horizontal drilling, the technique of drilling sideways for thousands of feet to plumb once-inaccessible rock formations. Lorenz said his small company is trying to find the tracts left behind by the bigger players, putting together blocks of acreage through land swaps and trades.
Martin of Double Eagle agreed, saying it takes even more creativity now to put together large enough parcels of land to drill horizontally.
And it’s expensive. West Texas landowners expect oil companies to pay a high price for land sitting on multiple layers of oilsoaked rock. The payoff for that could be great, but most small independent oil companies can’t afford the cost of entry unless they have a major financial backer, said Jeff Kelley, an exploration petrophysicist and geologist from Oklahoma.
Julian Ayala, a landman at oil producer Winchester Energy in Houston, said mineral owners in West Texas have become more sophisticated as the oil fields have boomed, having dealt with incoming drilling companies several times over, and knowing ways to figure out the market value of their property.
“They know they can get more if they want more,” Ayala said, adding he’s glad his company acquired its acreage on the edge of the Permian Basin three years ago. “They talk to each other in the coffee shops. They watch each other go to and from the Cadillac dealership. It sounds funny, but that’s the reality of it. They’ve been at this a long time.”
Red Stone Resources, a mineral purchasing company in Oklahoma, has recently ventured into the Permian Basin, buying up mineral rights in anticipation that the land there will eventually be developed by oil companies.
The company has tried to pinpoint the best spots to buy mineral rights in underdeveloped areas by watching the ebbs and flows of drilling rigs in the Delaware and Midland basins, and made its deals in West Texas amonthago.
“We go out and find individuals and families who want to sell their minerals because they don’t want to sit around and wait for a well to be drilled” by an oil company,” said Clayton Deering, a petroleum engineer at Red Stone. “We’re willing to pay them top dollar. But what we do is not easy.”
Oil companies are still flocking to the Permian Basin, but much of the region, particularly the Delaware Basin to the west, lacks the robust system of roads needed for the thousands of trucks hauling sand, water and oil to and from scattered drilling sites.
It’s an area rife with financial challenges and logistical obstacles, and the high cost of entry means new entrants will have to make every dollar count. And to reach long-term profitability, that means developing efficient operations, rather than simply boring infertile holes in the ground to hold onto drilling rights, executives said at the conference.
“The ones who are going to make it are the ones who are drilling to develop — they’re not just drilling to hold the acreage,” Gilmer of Drillinginfo said. “They’re going to recoup that acreage value back a lot faster.”
“They know they can get more if they want more. … They watch each other go to and from the Cadillac dealership.” Julian Ayala, a landman at Winchester Energy, talking about mineral owners in West Texas