Permian's Premium Pricing | Russell T. Rudy Energy LLC
With oil prices less than half what they were two years ago, why are land prices in the Permian Basin of West Texas and Southeast New Mexico at record levels? A recent article in “World Oil” explains why. There are a number of reasons, some of which relate to the universal law of supply and demand (yes, I know this sounds counter-intuitive), and some which are unique to certain operators.
Take QEP Resources Inc. for example. The company recently paid almost $60,000 per acres for 9,400 net acres in the area. This is roughly double the going rate when oil was booming in 2014. QEP might have paid the highest price per net acre so far, but Concho Resources Inc., Parsley Energy Inc., SM Energy Co. and Silver Run Acquisition Corp. have all paid premiums for land in the basin.
One would think that with oil prices below $50 there would be a glut of oil properties available and prices would be low. While this might be true in the macro sense, it would be misleading. The reality is that the Permian Basin is one of the few places where drilling for oil is still profitable at current prices. In fact, the area boasts some of the lowest break-even costs in the world, with more than a half dozen fields which are profitable when prices are below $30 per barrel.
Another reason for the Permian premium is multiple, stacked pay zones. While some plays offer one potential hydrocarbon bearing structure beneath the surface, the Permian Basin often offers several. QEP’s recently acquired acreage overlays 4 different know producing strata while 3 more which have exploration potential. Consequently, QEP’s recently purchased 9,400 acres could potentially support more than 400 horizontal wells. Richard Doleshek, QEP’s Chief Financial Officer, observed that while the price per acre might seem excessive, “When you look at it on a target basis, it’s relatively reasonable.”
Also, in QEP’s particular case, the company had been criticized by investors for not being a bigger player in the Permian Basin. With this purchase, the company has increased its position there by 50%.
Other factors which are fueling the Permian land grab are reduced development costs, due to the general downturn in activity, and technological advances. When land and drilling costs drop, it is easier to justify higher land acquisition costs.
Finally, Wall Street has been a factor. Due to their large presence in the Permian Basin, the shares of publicly traded companies like Concho and Parsley trade at a premium. Recently these two companies acquired acreage with stock, so they had to trade fewer shares to secure the land. Further, other Permian operators, such as QEP and SM have seen their stock prices spike after announcing deals in the area.
To read the article in its entirety, please go to http://www.worldoil.com/news/2016/9/19/stacked-oil-and-gas-make-permian-deals-costly-in-spite-of-rout .
Russell T. Rudy Energy, LLC buys oil, gas and mineral interests nationwide. Please call (800-880-0940), or write (info@rudyenergy.com ) to let us know if you agree, disagree or would just like to comment on this, or any of our posts.
