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Permian Basin 101: Market Bullish While Bubble Concerns Persist

Permian Basin 101: Market Bullish While Bubble Concerns Persist

The Permian Basin is one of the most productive oil and gas producing regions in the United States, with an output of over 2 million barrels per day. As recent hiring announcements suggest, producers are continuing to invest in one of the few spots in the country where oil exploration still turns a profit.

Responsible for about a quarter of total U.S. oil production and covering 75,000 square miles, the Permian Basin can be split into two areas: the Delaware Basin to the west and the Midland Basin to the east.

Operators’ drilling success was greatest in the Delaware Basin, where companies including Diamondback Energy and Occidental Petroleum spent billions to either enter or increase their holdings in the west subbasin. The privately owned Yates Petroleum Corporation holds almost 200,000 acres in the Delaware and was recently sold to Houston’s EOG Resources for $2.5 billion in stock and cash.

The Permian Basin is one of the last areas in the U.S. where it is still profitable to drill at sub-$50 oil, and it “is now considered the top U.S. onshore liquids region” according to an analysis from IHS Markit released earlier this year. The increase in M&A activity in the Permian Basin has been significant – as a percentage of total deals in the U.S., deals in the Permian increased from 7 percent in 2011 to 40 percent this year.

The explosion in land prices has some worried that unjustified high prices have created a “bubble”. Additionally, there are concerns that the increase in drilling activity could raise the costs of equipment and wages, which would put an additional squeeze on profit margins that are already tight.

Still, according to a recent report, the average breakeven cost in the Delaware region has fallen to $51.80/bbl, with the top 10 percent of wells breaking even at or below $30.00/bbl. With numbers like that, one can start to understand why producers are willing to pay a premium to drill in the Permian Basin, especially under the expectation that oil prices will rise substantially over the next two years.