Permian Basin Shale Leads In Texas' Oil Resurgence

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Texas has squarely reaffirmed its status as king of the oil patch.

Oil coaxed from the rapidly developing Eagle Ford and Permian Basin production areas recently lifted the state's output back above 3 million barrels per day (bpd) for the first time in more than three decades. That put the Lone Star state at more than a third of total U.S. oil production, vs. about 12% for No. 2 North Dakota. Texas is on track to outpace Iraq, which, at 3.2 million bpd in April, is the Organization of the Petroleum Exporting Countries' second-largest producer, behind Saudi Arabia.

Texas' resurgence stems from capital spending that is expected to top $44 billion in the Eagle Ford area and Permian Basin this year, says research firm Wood Mackenzie. Effectively all of those dollars are developing means to reach oil held in shale reservoirs, part of the shale oil and gas revolution that has altered not just the U.S., but the global energy landscape.


Since the boom started just after the turn of the century, new areas, new pipelines, rising efficiency and changing regulations have forced companies and analysts to reassess their outlooks on an almost weekly basis. Investors have struggled to keep up, and to keep current on who the dominant players are in this suddenly fast-evolving field.

South Texas

The Eagle Ford sprawls across south Texas from the border at Laredo to north of Austin. It was first developed as a natural gas play around 2008. Three years later, gas drilling in the area fell sharply as prices slumped. But unlike the other large-scale U.S. gas shale plays -- the Haynesville, in northeast Texas and in Louisiana; the Fayetteville in Arkansas; and the Marcellus shale, centered under Pennsylvania -- the Eagle Ford wore more than one hat.

"As it turns out, the Eagle Ford has highly productive oil shale," said Thomas Tunstall, research director with the University of Texas at San Antonio Institute for Economic Development.

In 2011, the Eagle Ford emerged as tops in capital spending among U.S. shale plays, with Haynesville falling to No. 2. The Bakken, the well-known shale play driving an oil boom centered in North Dakota, ranked a distant third.

Eagle Ford spending jumped from $19 billion in 2012 to $28 billion in 2013, easing a bit to $26.9 billion this year. The most active exploration and production firms includeEOG Resources ( EOG ) andPioneer Natural Resources ( PXD ).

"Eagle Ford is far and away No. 1, you've got about 200 rigs active there," compared with about 170 in the Bakken, said Wood Mackenzie analyst Benjamin Shattuck.

In terms of production, the Eagle Ford's July output rose to 1.4 million bpd, ahead of the Bakken and second only to the Permian Basin.

West Texas

Despite growth in capital spending, the Eagle Ford's production takes a back seat to the Permian Basin. The Permian is a century-old oil play covering much of west Texas and southwest New Mexico. The area is stitched with tens of thousands of vertically drilled wells. But players led by Pioneer,Devon Energy ( DVN ) andApache ( APA ) are rapidly ramping up spending as they explore the use of horizontal drilling techniques to exploit the Permian Basin's complex of multilayered reservoirs.

In the most recent Baker Hughes rig count, more than 900 rigs were working in Texas at the start of August. That's more than four times the 209 rigs in No. 2 Oklahoma.

More than 560 of those were drilling in the Permian -- 21% more than a year earlier. About 60% of those were drilling horizontal wells, according to Shattuck, with the rest still boring vertical wells.

Major oil players includingExxon Mobil's ( XOM ) XTO,Chevron (CVX) andOccidental Petroleum (OXY) are all ramping up production in the Permian. Independent Pioneer gives investors a fairly direct exposure to the Permian.

May new issueParsley Energy (PE) provides an even more direct connect to growth in the Permian's Midland basin, analyst Brian Gamble of Simmons & Co. International wrote in an email.

"Parsley will grow production 175% this year and 75% next year," he said, while larger Permian players, including Pioneer andConcho Resources (CXO), "will likely grow production 15%-30% annually over the next three years."

Wolfcamp/Cline Shale

The Wolfcamp/Cline Shale area, located within the Permian Basin, is vast, covering an area larger than Nebraska. Within that territory, the most concentrated development is occurring in formations named the Wolfcamp and Cline shales, in the central and eastern part of the basin. Exploration and production companies are expected to spend $12 billion there this year, up from $9 billion in 2013, forecasts Wood Mackenzie. That pushes the two areas past the $11.5 billion earmarked this year for the Marcellus.

What's drawing the big budgets?

"It's just the well performance," Shattuck said. "The rocks tend to perform really well with horizontal drilling."

Despite all the cash and effort, the strategy to produce simultaneously from multiple layers is, itself, still in beta mode. Operators are producing from multiple layers only on a small scale so far, Shattuck said, and no operator has yet been able to effectively develop multiple layers over any significant area.

Still, production in the Permian rose by 2% to 1.6 million bpd in July, up 30,000 bpd over June and up 17% since the start of the year. Wood Mackenzie projects the Wolfcamp alone will average 200,000 bpd of crude oil and condensate this year, rising to 700,000 bpd by the end of this decade.

Bakken

The geology named the Bakken is even larger than the Permian Basin. It sits within the larger Williston Basin, under North Dakota, Montana and Canada's Saskatchewan province. The area has been an oil and gas producing region for more than a half century. But horizontal drilling and hydraulic fracturing techniques have boosted production from an average of about 2,500 bpd in 2005 to 1.1 million bpd in July.

Spending plans in the Bakken slipped from $16 billion in 2013 to $15.2 billion this year. But unlike the Eagle Ford and Permian Basin, much of the science needed to exploit the Bakken's resources has been determined. That means less spending on risky exploration work.

"Most of the operators are out there in full-scale development mode," Shattuck said.

That is part of the strategy behindWhiting Petroleum's (WLL) $6 billion takeover ofKodiak Oil & Gas (KOG), announced in July. On Wednesday, the deal earned federal regulatory approval, effectively creating the Bakken's largest producer, with leases on 855,000 acres and 3,460 potential drilling targets.Continental Resources (CLR) is the Bakken's No. 2 player.

Major players are also attacking the turf with gusto.ConocoPhillips (COP) is quickly building production. In June, Exxon announced it was done with preliminary exploration work in the Bakken and put its 570,000 acres into "full development mode." Norway's majority state-ownedStatoil (STO) is also a major Bakken player.

Marcellus

Oil is only part of the U.S. shale-play landscape. The shale boom began post-2000 with gas production, first in the Barnett shale around Houston, then withSouthwestern Energy's (SWN) sweeping attack on the Fayetteville shale in Arkansas.

Today, spending and production is slipping in both those areas. The Marcellus shale, spread primarily beneath Pennsylvania, is driving U.S. natural gas growth. In July, natural gas output in the Eagle Ford rose an impressive 1.9% to 79 million cubic feet per day. The Marcellus boosted gas production by 1.6% to 247 million cubic feet for the month.

That has consistently driven U.S. natural gas production to monthly records. It also raises a question: As production continues to outpace demand, when might gas prices recover?

Among the Marcellus' biggest producers,Chesapeake Energy (CHK) saw earnings drop 29% in the second quarter.Cabot Oil & Gas (COG) maintained healthy growth whileEQT 's (EQT) EPS growth slowed to low single digits.

General demand for gas amid an unhurried economic recovery remains a key challenge. But unlike oil, natural gas can't turn to railroads and tanker trucks -- it needs pipelines to move from the well-head to market.

Pipeline constraints in the northeast Marcellus, for example, recently tamped prices at a key transaction hub there to $2.01 per million British thermal unit, vs. $3.77 at Oklahoma's benchmark Henry Hub, said Bill Holland, editor of Platt's Gas Daily.

Despite that pressure, a July report from Goldman Sachs rated Marcellus plays Cabot andRange Resources (RRC) as buys on the firm's Americas Conviction List. Range Resources makes Goldman's list because it locked up transportation for its production. Goldman says investors have misjudged the price Range Resources can command for production.

While gas stocks have fallen largely from favor with investors, Goldman remains optimistic on gas prices and demand throughout 2015, but with the clear caveat that a build-up in stored gas inventories remains a critical risk.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.




This article appears in: Investing , Investing Ideas

Referenced Stocks: EOG , PXD , DVN , APA , XOM

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