Drilling heats up in west Texas, Oklahoma

Strengthening oil prices have caused the U.S. oil patch to heat up, but the recovery is far from uniform.

Oklahoma’s SCOOP and STACK plays are among the fastest-growing oil fields in the country, but even those have little comparison to the massive interest sparked in the vast Permian Basin, which stretches from Midland, Texas, into southeast New Mexico.

Demand for the Permian has led to staggering sales prices for leases in the area in recent weeks, including deals involving Oklahoma companies.

Tulsa-based WPX Energy Inc. last week agreed to buy 18,100 acres in the area for $775 million. Excluding production, the deal translates to about $28,500 per acre.

Houston-based Noble Energy raised the stakes even higher five days later when it said it will buy 120,000 Permian acres from Clayton Williams Energy for $3.2 billion. Excluding production, Noble agreed to pay $36,500 per acre.

Despite the high price, the deal has drawn praise from Wall Street. Mizuho Securities analyst Tim Rezvan said the purchase addresses “the perceived lack of scale in the Delaware Basin that has been an overhang on NBL (Noble Energy) shares.”

In 2012, Oklahoma City-based Chesapeake Energy Corp. sold about 1 million Permian acres to Royal Dutch Shell and Chevron Corp. for about $3.3 billion. The deals were made as Chesapeake struggled to raise cash needed to make debt payments.

The company was criticized at the time for selling the leases at an average price of about $3,200 an acre, less than half the average recent sales price of $7,500 an acre.

Less than five years later, some industry insiders say the Permian is oversold. A Dec. 29 survey of oil and gas executives by the Federal Reserve Bank of Dallas found that respondents were concerned about high lease prices in the Permian and other basins.

“I feel that prices paid per acre in large transactions have probably gone past the reasonable economic limit,” one survey respondent said. “I seriously question the actual recoverable reserves that the growing public companies are projecting.”

Another respondent said Permian sales prices were approaching “price multiples associated with a bubble or Ponzi scheme.”

Booming prices are nothing new for the oil industry. If production continues to grow and sales prices keep strengthening, even the biggest deals could lead to big profits. But in the oil industry, what goes up, eventually comes back down.