In 2008 US oil production reversed a decades-long decline. From 5.1 million barrels per day (bpd) in early 2008, US crude oil production has now reached 7.5 million bpd. Two shale oil plays are widely credited with driving the resurgence.

The first is the Bakken Formation in the Williston Basin beneath North Dakota. Since 2008, oil production in North Dakota has increased from under 150,000 bpd to nearly 900,000 bpd. North Dakota has now become become the country’s second largest oil producer, trailing only Texas.

The second is the Eagle Ford Shale. 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 fracking, and they are two of the biggest contributors to the shale revolution. But there is more to the US resurgence in oil production than shale oil.

The Permian Basin beneath west Texas and southeastern New Mexico receives a fraction of the press coverage accorded the Bakken and Eagle Ford, but it has more production potential than these two shale formations combined. The reasons it’s often overlooked are that the Permian is not just a shale oil play, nor is it a recently developed basin.

The geology of the Permian Basin is complex, with numerous oil-producing plays in stacked layers. The Permian has commercial accumulations of oil and gas 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.

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. Industry experts estimate that, at current prices, more than $3 trillion worth of oil and more than $300 billion of natural gas are 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.

There are numerous drillers making major investments in the Permian Basin. The list is long, but it includes Occidental Petroleum (NYSE: OXY), Chevron (NYSE: CVX), Devon Energy (NYSE: DVN), Pioneer Natural Resources (NYSE: PXD), Concho Resources (NYSE:CXO), ConocoPhillips (NYSE: COP) and Apache (NYSE: APA).

Occidental Petroleum 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, which amounted to ~ 16 percent of total Permian production.

Concho Resources is a smaller operator, but a purer 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).

For more conservative investors, the pipeline companies operating there are well-positioned to make money. Expansions are underway, but the present takeaway capacity in the Permian Basin is pretty tight given the growing crude supply:

Source: RBN Energy

In last week’s Energy Strategist, I took a more in-depth look at some of the drillers operating in the Permian Basin. In next week’s Energy Strategist I will review the pipeline projects aiming to capitalize on the Permian’s expected production boom over the next five years.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Portfolio Updates

A Crack in the Gloom for Refiners

Something good finally happened to refining stocks last week, two good things in fact. The first was simply that the crack spreads, aka refining margins, finally bottomed at an unsustainable level of some $6 per barrel for gasoline, before rebounding closer to $10, still less than half the peak from March.

The second was a leak of an Environmental Protection Agency lower next year’s legally mandated ethanol and biofuel blending quotas in recognition of inadequate biofuel supply and ethanol demand.

The EPA’s proposal, still subject to official release and multiple revisions in addition to potential legislative revision and almost certain legal challenge, would cap the blending quotas well shy of this year’s levels. These proved challenging enough to spark a bidding frenzy on the tradable certificates needed to make up any quota shortfall, hitting refiners’ already drooping bottom line.

But while the biofuel burden got the ink last week, the action in the crack spreads is more important to the sector in the long run. At $6 per barrel, or about 19 cents per gallon, the spread was near the bottom of its historic range, and overdue for a bounce. Big-picture positives include booming domestic crude production that ought to be good for the refiners in the long run and the fact that long-declining US fuel demand is rebounding from last year’s 15-year lows so far this year.

And while our refining picks bounced with their peers late last week, rallying 8 percent or so in the aggregate Thursday and Friday, they still haven’t even made it back to their declining 50-day moving averages. This upcoming earnings results will show big year-over-year declines, and how much of that bad news is already priced in remains a mystery. But in the longer run these are cheap stocks that could appreciate significantly if the always volatile industry fundamentals start to improve, as they should eventually. Continue to Hold Marathon Petroleum (NYSE: MPC), Tesoro (NYSE: TSO) and HollyFrontier (NYSE: HFC).

American Railcar’s Surprise Departure

Shares of tank car builder and Aggressive Portfolio holding American Railcar Industries (Nasdaq: ARII) dropped 6 percent Monday, three days after the company announced an unplanned departure of its CEO to “pursue other opportunities.”

The market shrugged off the disclosure as immaterial on Friday, but perhaps it took some time to arrive  at a different impression.

Departing CEO Jim Cowan, 55, is a well-regarded company and industry veteran, and his exit is unlikely to signify operational issues at ARII. But it did come exactly two weeks after the announced merger of ARII’s leasing operations with those that had been privately owned by ARII Chairman Carl Icahn in a joint venture under the aegis of Icahn Enterprises (NYSE: IEP). The timing is curious, though there is no evidence that these two developments are related.

In any case, ARII, which named the head of its manufacturing operations, Jeffrey Hollister, to replace Cowan on an interim basis, is likely to keep chugging along just fine. Monday’s drop which put the stock within our buying range, should prove a longer-term opportunity. Buy ARII below $40.

— Igor Greenwald