New Form of Crude Oil Among Wave of Development for Permian Basin Petroleum Plays

October 22, 2018 -

The wave of development out the Permian Basin continues to fuel the fortunes of oil producers operating in West Texas and New Mexico. The latest boost in the region is coming from a new kind of oil being produced in West Texas, known as West Texas Intermediate Light, or WTI Light.

Sales of the new stream of light crude began in September, securing a market for the increasingly less dense oil being pumped from the largest U.S. shale play. The announcement of a new product is yet another signal of good news from the region that pushed the U.S. into position as the world’s leading crude oil producer again.

Since March, approximately $30 billion of U.S. shale acquisitions have been announced—nearly all of which are focused on the Permian. Several players are staking their reputations on the region by amassing their positions in West Texas and New Mexico including Concho Resources Inc. (NYSE: CXO), Earthstone Energy, Inc. (NYSE: ESTE), Occidental Petroleum Corporation (NYSE: OXY), Ring Energy, Inc. (NYSE: REI) and Permex Petroleum Corporation (CSE: OIL).

Central to the reinvigoration of the region has been a larger focus on horizontal drilling and other technological advancements, that have created a massive new oil and gas boom. This year, producers are expected to drill 4,000-5,000 horizontal wells.

There are 27 operators who have drilled more than 250 horizontal wells and account for more than 60% of the region’s horizontal wells. And despite rumblings of shortages on pipeline capacity, rig availability and drilling necessities like fracking sand, the Permian is still getting hotter.

Take for instance the recent splash made by mid-cap Earthstone Energy, through a $950 million deal that will boost the company’s footprint in the Midland Basin portion of the Permian Basin by 69%.

Deals are being made, even at the junior level in the form of Permex Petroleum, striking deals with majors such as Occidental Petroleum, as was announced earlier in the summer. With a newly announced access to capital, Permex is now searching for economic opportunities to build up its production and cash flow, through acquiring properties that are already producing.

Several opportunities are available to the market for getting involved in the Permian Basin, as the picture of U.S. as a leader of the world for oil production has finally come back into view.


Concho Resources Inc. (NYSE: CXO)

The core operations of Concho Resources are focused on the prolific Permian basin. The large-cap E&P has an enviable acreage of low-risk top-tier assets and a multiyear drilling inventory. With $9.5 billion RSP Permian acquisition, Concho has been able to bolster its scale and positioning in the region. As of December 31, 2017, Concho’s total estimated proved reserves were 840 million barrels of oil equivalent.

Earthstone Energy, Inc. (NYSE: ESTE)

The Woodlands-based Earthstone Energy Inc. recently reached a $950 million deal to boost its footprint in the Midland Basin portion of the Permian Basin by 69%. The deal involved the acquisition of all of Sabalo Holdings LLC’s interests, through a cash-and-stock deal, that will have Earthstone pay out $650 million in cash and $300 million in stock at approximately $9.29 per share. Including the additional 1,330 acres, Earthstone is set to acquire 20,800 net acres in the Midland Basin with an estimated 488 gross operated horizontal drilling locations and 349 gross non-operated horizontal drilling locations.

Occidental Petroleum Corporation (NYSE: OXY)

Through confidence in its Permian Basin position, Occidental Petroleum indicated it would be pulling out of its Qatar interests, with the intention to ramp up its Permian operations. With a total combined Permian production of approximately 354,000 boe/d, Occidental is the largest operator in the region—controlling approximately 2.5 million net acres in the shale play. The company entered the region back in 2000 when it acquired then Texas’ largest oil and gas producer, Altura Energy. In 2017, Oxy acquired more Permian wells from Hess Corp for $600 million, and recently partnered with small-cap company Permex Petroleum possibly giving an opportunity to pass the torch of knowledge.

Ring Energy, Inc. (NYSE: REI)

During Q2 of 2018, Ring Energy experienced a temporary disruption in their production growth rate. With daily production levels at around 6,605 barrels per day as of June 2018, Ring is still a smaller player within a large group of drillers, all while growing both production and reserves at aggressive rates, while enjoying significant short-term and long-term competitive advantages. Ring Energy continues to look at acquiring more Permian opportunities, while also increasing their horizontal drilling and development program. Earlier this year Ring announced access to $175 million through its senior secured credit facility, up from $60 million, which should help the company achieve some of its goals in the Permian in the coming months.

Permex Petroleum Corporation (CSE: OIL)

Since entering the region ahead of the curve, Canadian small cap Permex quietly accumulated a very respectable land base in the Permian Basin for pennies on the dollar before the region’s boom began. By targeting divesting companies that were deep in debt, or close to going bust, Permex amassed a series of assets across 6,500 acres of Permian acreage. The parcels came with several wells primed for re-entry, stimulation, and other forms of enhanced oil recovery. Since establishing itself in the region, Permex managed to sign a WI partnership deal with major Occidental. Permex is now set on increasing production through a gradual two-phase strategy.

Stockpiling Permian Production

As the region experiences service shortages, such as rigs, fracking sand, etc., junior explorer Permex Petroleum Corporation (CSE: OIL) has carried on its growth pattern through further acquisitions.

Ahead of the Permian rush, Permex achieved an early-mover advantage through quietly acquiring assets across the basin in west Texas and New Mexico. Despite its current market value of approximate $10 million in market cap, Permex has successfully acquired 6,500 acres, with approximately 9 million barrels in 2P reserves.

At current $68/barrel WTI prices, the reserves alone are more than $600 million USD, gross. However, what the market is looking for now, is cash flow—which is what the company appears to be targeting now.

In a recent press release, Permex announced it had secured access to $5 million in debt capital, which is set to be used for acquiring producing properties. With each new property they acquire, the larger their monthly cash flow will likely be.

Permex already has a sizeable land position for its market cap, especially in New Mexico where it controls 2,650 acres.

now the company has an opportunity to leverage its land position to possibly divest when necessary to raise capital for its drilling and completion goals. A recent New Mexico lease auction saw an average per-acre price of $95,000 paid out. Keeping in mind that not all land is valued equally, $95,000 is the average.

If one conservatively looked at half the average value ($47,500/acre) and applied it across the company’s 2,650 acres, Permex’s land alone in New Mexico would today be worth nearly $126 million. Even at a quarter of the value, Permex’s land in New Mexico alone would be worth roughly $63 million—more than 600% the company’s current market cap, without factoring in the reserves already in place, nor the additional 3,850 acres of acreage in Texas Permian.

Permex has already begun re-entry and stimulation programs on shut-in wells in a very economic fashion. However, there’s still plenty of other opportunities for a company of its size to acquire production, outside of re-entry and stimulation.

Over the time that Permex has built up its portfolio, it has also gained the attention of much larger players in the region, including Occidental Petroleum Corporation (NYSE: OXY) whome Permex has already inked a strategic alliance with.

For a company of Permex’s size, there are plenty of smaller producing properties that are too small for the bigger players to keep, but are just right for increasing Permex’s monthly cash flow.

With the rate on Permex’s accessible cash running roughly $26,000 per month in interest, finding any properties that are already generating $100,000-$200,000 per month is an absolute no-brainer.

Permex has wisely kept its shares outstanding at a respectable 35 million. Through borrowing and growing cash flow, it’s a strategy that doesn’t dilute the stock.

At the moment there’s still a disconnect on the company’s value, given its land, resource, and production capability. Should that disconnect evaporate, the market could finally awaken to Permex’s long-term value.

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