The Permian Basin, located in (mostly) Texas and New Mexico, has been in the news a lot lately. Earlier this month EOG Resources (NYSE: EOG) stoked the acquisition frenzy in the basin by purchasing privately held Yates Petroleum for $2.5 billion in stock and cash. The deal increased EOG’s position in and around the Permian to 574,000 net acres, and doubled its net acreage in the Delaware Basin in southern New Mexico and West Texas. EOG also announced it would shift its focus away from the Eagle Ford shale.

Meanwhile, Apache (NYSE: APA) announced a discovery in the Permian’s Southern Delaware Basin of an estimated 75 trillion cubic feet (tcf) of natural gas and more than 3 billion barrels of oil, nearly equal to the annual U.S. crude output.

This seems like a good time to review the Permian Basin and highlight some of its pure-play producers.

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. One horizontal shale play within the Permian called Wolfcamp is estimated to contain 2 to 4 times the estimated oil reserves of the Eagle Ford or the Bakken. And there are multiple commercially viable layers of oil and gas above and below Wolfcamp.

The geology of the Permian Basin is rich and complex, both horizontally and vertically. The greater Permian is made up of several subsidiary basins, the largest of which are the Midland and the Delaware.

Source: Bureau of Economic Geology, The University of Texas at Austin

The deposit layers tend to overlap, and, there is probably no U.S. production region with as tall a stack of them as the Permian:

Source: The Wall Street Journal

The Texas side of the Permian has now produced some 29 billion barrels of crude, which is equivalent to more than four years of current U.S. demand. Despite producing oil since the 1920s, the Permian Basin is still the largest oil-producing region in the U.S., accounting for 23% of domestic production.

More importantly, the Permian Basin is projected to still contain recoverable oil and natural gas resources exceeding the combined total of the Eagle Ford Shale and the Williston Basin (home of the Bakken Formation).

This is reflected in the pace of drilling. Over a third of the land rigs drilling for oil in the U.S. are deployed in the Permian, which has more than three times the combined rig count of the Eagle Ford and the Williston Basin. Further, activity in the Permian Basin has picked up significantly in recently months, with the rig count there climbing 50% since May:

Permian crude oil production has more than doubled since 2010 thanks to six low-permeability formations: Spraberry, Wolfcamp, Bone Spring, Glorieta, Yeso and Delaware. The bulk of the growth came from the Spraberry, Wolfcamp and Bone Spring as a result of horizontal drilling and hydraulic fracturing.

Occidental Petroleum (NYSE: OXY) is the leading Permian crude oil producer. Large, diversified oil companies like Oxy, Chevron (NYSE: CVX), Apache, EOG and ConocoPhillips (NYSE: COP) are all among the region’s heavyweights.

But for the most concentrated exposure to the Permian Basin, there are a handful of pure plays to choose:

• EV – Enterprise Value in billions of U.S. dollars as of September 16
• EBITDA – Earnings before interest, tax, depreciation and amortization for the trailing 12 months (TTM), in billions
• FCF – Levered free cash flow for the TTM, in millions
• FQ – Most recent fiscal quarter
• Debt – Net debt at the end of the most recent fiscal quarter
• Res – Total reserves at year-end 2015 in barrels of oil equivalent (BOE)
• YTD Ret – Total shareholder return, including dividends, in 2016

Pioneer Natural Resources (NYSE: PXD) is the largest company in the group, and one of only two to generate more than $1 billion of EBITDA over the past 12 months. But it’s also in the red by over a billion dollars on free cash flow over the past year, has the highest EV/Reserves multiple of the group, and the second-highest EV/EBITDA valuation.

Concho Resources (NYSE: CXO), has the most attractive financial measures within the group and is the only company on the list with positive free cash flow for the most recent quarter and the past 12 months. It’s relatively attractive on both the Debt/EBITDA and EV/EBITDA measures.

Concho is a focused Permian producer with core operating areas spanning 1.1 million gross acres within three distinct parts of the basin. One of the top oil producers on the Texas side of the Permian, it’s also the top producer of oil and third-largest producer of natural gas in New Mexico. The company operates more than 5,500 wells and controls more than 22,000 future drilling locations.

Diamondback Energy (NYSE: FANG) and Parsley Energy (NYSE: PE) are expensive on the basis of EV/Reserves and EV/EBITDA). Others on the list are more burdened with debt and cash flow deficits. These are companies that may find themselves in financial trouble if oil prices remain depressed for another year.

It’s interesting to note that the average EV/Reserves mutiple for this group is near $40 per barrel of oil equivalent. Most major integrated companies like ExxonMobil (NYSE: XOM) are around $20, and BP (NYSE: BP) is below $10. Oasis Petroleum (NYSE: OAS), a pure-play Williston Basin producer, has an EV/Reserves value of $17.26.

These high valuations are a testament to the market’s high regard for the Permian’s potential, which is remarkable considering how much it has already yielded.     

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