Economics and Opportunities Driving Consolidation in Top-Performing Permian Basin

Estimated reading time: 4 minutes

In an energy market struggling from oil price declines and anemic financial returns, the Permian Basin is the only U.S. unconventional liquids resource seeing significant year-over year, per-well productivity gains. The Permian is single-handedly helping to sustain activity and has caused the region to become a hotbed of consolidation, according to new analysis from IHS, the leading global source of critical information and insight.

According to the IHS Energy North America Supply Analytics report entitled The Permian Basin—Need for Improved Economics and Opportunities Drive Consolidation, peak productivity in the Permian Basin has improved by more than 40 percent since third-quarter 2014, led primarily by the Bone Spring play. This performance has not gone unnoticed by either operators or the markets, the IHS report noted, with the markets showing a preference for Permian deals. In 2015, more than 35 percent of deals were focused on the Permian Basin.

 “More than 1,000 operators have generated new volumes from the Permian since January 2014, but just 10 operators are responsible for more than 50 percent of the combined liquids production in the play,” said Reed Olmstead, senior manager – North America Supply Analytics Service at IHS Energy. “At the other end of the spectrum, more than 650 operators are generating less than 3,000 barrels per day in the play. Due to the performance of the play and the interest and activity in it, IHS expects consolidation to increase in the play before the second half of 2016, and that consolidation in the Permian will occur at a greater rate than in other domestic plays. Operators are looking to focus their money on areas that can generate economic returns at depressed oil prices, and the Permian keeps rising to the top when you look at cost and performance. Permian deals skyrocketed in 2015, passing all other plays.”

Considering all Permian deals, the Midland Basin of the Permian has seen slightly higher 1P reserve valuations recently, bringing the play average up from $13 per 1P (proven) barrel of oil equivalent (BOE) of reserve to nearly $18. By contrast, the IHS report said, Eagle Ford 1P reserves have seen recent valuations closer to $15 per BOE. The “Permian Premium” indicates the upside expected from the play, as productivity continues to increase.

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