The oil slump has been hard on the Texas economy, slowing our vaunted jobs machine and pinching state revenue headed into next year’s legislative session. But there’s a renaissance underway in West Texas. New money is flowing into the Permian Basin, pushing up land prices and promising a new wave of drilling. Even as oil languished between $40 to $50 per barrel, rigs were being added and the Permian once again took its place at the center of the domestic oil scene.
Wall Street is fueling this latest round of deal-making, perhaps sensing that the market hit bottom. In August, Blackstone Group announced a $1 billion joint venture with Jetta Operating of Fort Worth to acquire leases in the Permian’s Delaware Basin and southern New Mexico. Another $500 million will be directed to a new Dallas company called Guidon Energy, led by a former Pioneer Natural Resources executive.
Other big-name investors like Apollo Global Management and WL Ross have reportedly been buying up debt of distressed energy firms. Meanwhile, experienced players are building positions. In July, Silver Run Acquisition, run by former EOG Resources chief Mark Papa, announced a $1.7 billion deal to acquire a controlling interest in Centennial Resources, which has more than 40,000 acres in the Delaware Basin.
Altogether, the Permian has accounted for nearly half of the country’s energy M&A spending this year, with more than $14 billion in deals, according to Ben Shattuck, a principal analyst with research firm Wood Mackenzie in Houston.
Why? There are several factors at play. Advances in horizontal drilling and hydraulic fracturing have given new life to the region that has been a vital source of Texas wealth but appeared past its heyday. The Permian is vast, stacked with layers of shale deposits that can now be tapped. And an abundance of service companies and ready infrastructure helps hold costs down.
“You can make money in West Texas today. That’s the simplest way to put it,” Shattuck says. He estimates about 70 teams are currently scouring the Permian for assets. As falling oil prices depressed activity in newer fields like the Bakken in North Dakota and Eagle Ford in south Texas, the Permian emerged as the only major U.S. oil shale that’s still growing, according to Scott Sheffield, the outgoing CEO of Irving-based Pioneer Natural Resources, one of the field’s major players.
About 50 percent of the U.S. oil rig count is now in the Permian, compared to 15 percent four years ago, Sheffield said during a presentation at a Barclays energy conference in September. Based on recent investments, he expects as many as 100 more rigs will be added in the next year, bringing the Permian count to about 300.
“People know that the Permian is very oily, and they have to be there long-term,” Sheffield said.
He estimated there’s more than 1 trillion barrels of oil in place in the Permian, with only 35 billion produced to date. The U.S. now holds more oil reserves than Russia and Saudi Arabia, he says, and new discoveries continue to expand the pie. Blackstone, which has invested in Texas oil and gas fields for more than a decade, saw the potential and dedicated $9 billion in capital to the energy sector through funds it manages.
“I’d say it’s less a call on the cycle and more a call on the basin,” says Angelo Acconcia, a senior managing partner for Blackstone Energy Partners, explaining the recent deals.
Blackstone doesn’t anticipate a quick recovery in oil prices. But the company views itself as a long-term investor, with time horizons of 10 years or more on its energy plays. Sheffield, who is retiring as Pioneer’s CEO at the end of the year, also has his company set up for the long haul. Under his leadership, Pioneer sold off international operations to focus on the Permian, where it picked up assets on the cheap in the 1990s. He sees Permian production increasing from 2 million barrels a day to 5 million barrels a day by 2025. He thinks prices will move up some, but still only average between $50 and $60 a barrel over the next decade, with peaks as high as $80 and other periods down near $40.
This all bodes well for Texas. Sounds like oil could fuel growth here for another generation.
Steve Kaskovich is the deputy managing editor of business for the Fort Worth Star-Telegram.
