After nearly 40 years of mostly declining oil production, US crude output staged a dramatic turnaround starting in 2008. From 5.1 million barrels per day (bpd) in early 2008, US crude oil production has now reached 7.3 million bpd for the most recent quarter. Remarkably, the US is now the fastest growing oil producing region in the world, and the once-unthinkable is within reach: If the production increases continue at this pace through the end of the decade, the US would surpass the previous crude oil production peak of 10.0 million bpd that has stood since November 1970.

Ask someone about the resurgence in US oil production, and they may talk about the fracking revolution, which refers to the marriage of the decades-old techniques of hydraulic fracking to horizontal drilling. They will probably first mention the Bakken Formation in the Williston Basin that lies underneath North Dakota. For good reason — since 2008, oil production in North Dakota has increased from under 150,000 bpd to the current level of nearly 900,000 bpd. In 2012 North Dakota surpassed Alaska to become the country’s second largest oil producer.

They will then probably mention the Eagle Ford Shale, which is Texas’ answer to North Dakota’s Bakken. Like the Bakken, the Eagle Ford is a tight oil formation rendered economical by high crude prices and the application of fracking and horizontal drilling. The Eagle Ford stretches across South Texas, and is projected to grow even faster than the Bakken. In the past five years Eagle Ford oil production has grown from essentially zero to 600,000 bpd in the first half of 2013. Projections have production reaching 930,000 bpd this year and well beyond 1 million bpd by mid-2014.

These two formations come to mind first because their development was enabled by the fracking revolution, and they saw production go from nearly zero to the vicinity of a million barrels a day each. There are numerous other shale plays in the US, producing both oil and natural gas. But there is another formation with more potential than the Bakken and Eagle Ford combined.

Few people beyond Texas associate the resurgence in US oil production with the Permian Basin, centered on West Texas. The Permian receives a fraction of the press coverage accorded the Bakken and Eagle Ford.

The reasons it’s often overlooked are that the Permian is not just a shale oil play, nor is it a recently developed basin. By the time the shale oil revolution started, the Permian had already produced billions of barrels of oil. The area has been pumping crude since 1921, and made boomtowns out of cities like Midland and Odessa long before fracking became a household word.

According to the Texas Railroad Commission, the Permian Basin has already produced more than 29 billion barrels of oil and 75 trillion cubic feet of natural gas. To put these numbers in perspective, US consumed 6.8 billion barrels of oil and 25 trillion cubic feet of natural gas in 2012.

More importantly, the Permian Basin is projected to still contain recoverable oil and natural gas resources exceeding what has already been produced. In other words, industry experts still estimate that, at current prices, more than $3 trillion worth of oil and more than $300 billion of natural gas have yet to be extracted. These projections dwarf the combined estimated reserves for the Bakken and Eagle Ford, and indicate that there are still many fortunes to be made in West Texas.

The Permian Basin has commercial accumulations of oil and gas in stacked layers, at depths ranging from 1,000 feet to more than 25,000 feet. The Permian currently produces some 900,000 bpd of crude, about 12 percent of US oil production. Some analysts expect Permian production to more than double by 2018 to 2 million bpd — a level last reached during the 1970s.

Occidental Petroleum (NYSE: OXY) is the largest producer of crude oil not just among the more than 1,500 operators in the Permian Basin, but in all of Texas. Last year, Occidental produced an average of 207,000 bpd in the Permian Basin, which amounted to ~ 16 percent of total Permian production.

Two-thirds of OXY’s Permian oil production comes from fields subjected to enhanced oil recovery (EOR) techniques. EOR works by changing the flow dynamics of the oil so it can more easily move through the reservoir. OXY uses gas injection, which works by injecting carbon dioxide into the well. The carbon dioxide mixes with the oil, lowers its viscosity and sweeps it toward the production well. This approach allows can increase the ultimate total output of a field by as much as 25 percent.

Occidental is currently a Best Buy in our Growth Portfolio, but OXY is a major integrated oil company with midstream assets and a chemicals division. The Permian is just one of its places of business. In 2012, the Permian accounted for less than half of OXY’s US production and less than 30 percent of the company’s global output. So while we like the company and believe that its Permian Basin assets will boost earnings for years to come, their contribution won’t move the needle as much as the Permian will for the next company.

Concho Resources (NYSE:CXO) went public in 2007, and in 2011 the company divested its Bakken assets to become a pure Permian play. Concho’s core operating areas within the greater Permian Basin are the New Mexico Shelf, the Delaware Basin and the Texas Permian. Since the company went public, its share price has risen 746 percent (although the past 12 months have seen a relatively modest 16 percent gain).

At the end of 2012, Concho’s estimated proved reserves were 447.2 million barrels of oil equivalent (BOE), with 61 percent oil and 39 percent natural gas. During 2012, the company had approximately 630,000 net acres under lease, and produced 29.8 million BOE of oil and natural gas.

For the most recent quarter, the second quarter of 2013, Concho drilled 196 gross wells and produced 8.3 million BOE, up 30 percent since the second quarter of 2012 and a 7 percent increase over the first quarter of 2013. The company operated 25 rigs, with 18 drilling horizontally. EBITDAX was $424.8 million in Q2 2013, an increase of 30 percent from $327.4 million reported in the second quarter of 2012 and an increase of 25 percent from Q1 2013. Concho has an enterprise value of $15.1 billion, and an enterprise value/EBITDA ratio of 11.7 for the trailing 12 months.

A newer publicly traded company in the Permian Basin arena is Diamondback Energy (Nasdaq: FANG), which had its IPO a year ago this month and has since seen shares soar by 150 percent. Diamondback used the proceeds of its IPO to acquire properties in the Permian, and it has essentially no debt. Year-over-year quarterly revenue growth is up to 183 percent, and the future looks bright. But the short interest on this one is nearly 20 percent of the float, suggesting that a lot of people believe this one has gone up too fast, too soon.

A more recent pure Permian entry than Diamondback is Athlon Energy (NYSE: ATHL), which just had its IPO in August. So far shares are up 10 percent. The company is of a similar size to Diamondback with an enterprise value of $3.1 billion, but carries much higher debt. Athlon has drilled 230 wells in the Permian’s Cline, Spraberry, Wolfcamp, Strawn, Atoka and Mississippian formations. The company had $178.6 million in revenue over the last 12 months and a net income of $73.9 million. However, the forward price/earnings ratio for 2014 is a bit high at 25, versus 16.8 for Diamondback and 22 for Concho. Further, with the high level of debt, Athlon will be particularly vulnerable to a drop in oil prices.

Beyond these companies, there are many reputable drillers making major investments in the Permian Basin. The list is long, but it includes Conservative portfolio holding Chevron (NYSE: CVX), recent Growth Portfolio addition Devon Energy (NYSE: DVN), Pioneer Natural Resources (NYSE: PXD), ConocoPhillips (NYSE: COP) and Apache (NYSE: APA).

But someone has to move that oil and gas to markets, and the present takeaway capacity in the Permian Basin is pretty tight given the growing crude supply:

Source: RBN Energy

In the next Energy Strategist, I will review the pipeline projects aiming to capitalize on the Permian’s expected production boom over the next five years.