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Permian Takeaway Pains Leading to Other U.S. Basin Gains

Pipeline capacity constraints in the crowded Permian Basin won’t lead to any sharp pullback but they have led to opportunities elsewhere in the U.S. onshore, many of the largest domestic producers said last week.

The annual Barclays Energy and Power CEO Conference, held in New York City, drew almost 200 companies and nearly 2,000 clients. Analysts Michael Cohen and Samuel Phillips offered a macro view of the salient points by exploration and production (E&P) companies and oilfield service (OFS) operators.

There was no surprise about the leading topic at the flagship confab: Permian oil and gas takeaway constraints.

“The key concern is in the Permian, where mixed messages from producers and service companies is keeping investors wondering about the sector overall,” said the analyst team.

“Producers universally indicated that they planned to marginally slow down their drilling and completion activity in the Permian because of pipeline constraints.”

But it’s not a long-term issue. Halliburton Co., which announced a reduction in its 3Q2018 outlook, said several E&Ps may have “blown through” 2018 Permian budgets, but they planned to get “straight back to work” in January.

“E&Ps have strategies in mind” should a major price collapse occur in the Permian, said the Barclays team.

They cited Diamondback Energy Inc. and Encana Corp., among a few others, which indicated that if differentials blow out too much, they “would likely adjust the shape of their production profiles in 2019 to deal with the egress issues.”

Growth may slow short term but it won’t stop.

“The slowdown in drilling and completion activity due to Permian bottlenecks is likely to reduce service sector activity and lead to a reduction in the growth trend,” said Cohen and Phillips. Barclays already pared its Permian production forecast months ago. It expects output growth of 400,000 b/d from 3Q2018 to 3Q2019, and about 500,000 b/d annually.

The takeaway problems in the Permian are becoming a drawing card for other basins.

“The egress situation in the Permian is casting a pall on investor interest in Permian-focused E&Ps and is leading to a decline in completion activity,” the Barclays team noted. “Though some equities investors we spoke with seem to be confident they can see through the pain, others are wondering whether the problem is more structural than temporary.”

The strain some Permian E&Ps are likely to face for the next six-to-12 months should benefit the Powder River Basin, Niobrara formation, Oklahoma’s myriad reservoirs and the Bakken Shale.

WPX Energy Inc., Continental Resources Inc., Marathon Oil Corp. and Hess Corp., which together account for nearly one-half of the crude and condensate production in the play, all reported encouraging results.

Continental, the largest oil producer in the Bakken, noted a “step change in well performance rapidly expanding” across its leasehold and a sharp uplift in the rate of return versus 2017 from optimized completions.

Renewed Interest in Austin Chalk

Also on the radar for expansion is the Austin Chalk, which extends from South Texas into Louisiana. EOG Resources Inc., which expects “more subdued” growth in the Permian, as well as Magnolia Oil and Gas Corp. both pointed out that their Austin Chalk acreage is seeing better returns than parts of their Eagle Ford position,” analysts noted.

Relative newcomer Magnolia cited flat production curves as beneficial to returns, “with wells seeing few declines” in the first six-to-nine months they are online because of a boost from conventional production.

Encana, also with a substantial Eagle Ford leasehold, reported internal rates of return at 100% at $50/bbl oil and $3.00/Mcf gas. The South Texas play benefits from its exposure to favorable Louisiana Light Sweet crude and Houston Ship Channel pricing, it noted

Well performance in some key plays appears to be retreating, according to Schlumberger Ltd., which said reservoir performance was “slipping” in the Eagle Ford and Permian.

“Interference between parent and child wells were cited as a likely cause, and the company stated that more sand and water pumping might alter reservoir response in the future,” Cohen and Phillips said. “Similar concerns about interference from spacing wells too closely were echoed by a number of E&Ps as well.”

For example, SM Energy Co. in its presentation said that after years of downspacing in the Eagle Ford, it has begun to increase spacing to improve well results. EOG is developing the Permian Wolfcamp position at 440-acre spacing “after seeing greater interference when packing the wells tighter.”

Devon Energy Corp. “also said it might start increasing well spacing in the Permian,” while Diamondback Energy Inc. “warned that as it drills further into fringe acreage, actual well performance might decrease versus the current curves on a full-field basis.”

Meanwhile, the management team at Concho Resources Inc., one of the largest Permian pure-plays, doesn’t see an end in sight to improving efficiencies. Apache Corp. said its Permian performance, tied to the Alpine High, also is exceeding expectations.

Beyond Texas, Marathon reported “rapidly improving well performance” in the Bakken, which it said had “extended the core and improved the quality of the remaining well inventory.”

On balance, warning signs are emerging about how much longer efficiencies may improve, but “it is too soon to call the end of the productivity improvement cycle,” and analysts said they are confident that producers, on balance, will be able to “squeeze more out of the rocks.” They said Industry innovation should keep productivity declines in check while asset level breakevens continue to improve.

While many operators of late have blasted the Trump administration’s recently enacted steel tariffs, they likely won’t have much of an impact, “as steel tubulars make up a small percentage (less than 10%) of the overall cost of a well,” said the analyst team.

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