The Permian Basin continues to be the hottest oil play in the country. More than 50% of the rigs drilling for oil in the U.S. are doing so in the Permian, and the rig count there has more than doubled since last summer. Oil companies everywhere are scrambling to get a piece of the action.  

Today I want to highlight the major producers and review some of the recent acquisitions in the area. But first, a short primer on the region.

A Stacked and Marked Deck

The Permian Basin spans some 75,000 square miles of west Texas and southeastern New Mexico, and has been continually producing oil since 1921. Oil and gas are found throughout the region in stacked layers at depths ranging from 1,000 to more than 25,000 feet. There are several low-permeability formations that are currently driving oil production in the Permian, including Spraberry, Wolfcamp and Bone Spring. Last year a study by the U.S. Geological Survey estimated 20 billion barrels of undiscovered, technically recoverable oil in the Wolfcamp alone.

A recent assessment by Wood Mackenzie explains the recent land rush: the Permian formations yield some of the lowest-cost oil in the country. Wolfcamp, for instance, is estimated to have breakeven prices just above $40 per barrel.

This also helps explain why production in the Permian continued to increase over the past two years, even as it declined in other major formations like the Eagle Ford and Bakken. According to the Energy Information Administration’s (EIA) most recent Permian Region Drilling Productivity Report, the Permian is now producing nearly 2.2 million barrels per day (bpd) of oil, exceeding the combined output of the Bakken (just under 1.0 million bpd) and the Eagle Ford (just over 1.0 million bpd). This makes the Permian the world’s second most prolific oil field, behind only Saudi Arabia’s Ghawar.

As of December, the five largest acreage holders in the Permian Basin were Occidental (NYSE: OXY), Conservative Portfolio recommendation Chevron (NYSE: CVX), Growth Portfolio holding Apache (NYSE: APA), ExxonMobil (NYSE: XOM), and Concho Resources (NYSE: CXO).

Keep in mind that this is a pretty diverse bunch. Two are supermajors, Oxy is a large integrated producer, Apache is solely an oil and gas producer with operations around the world and Concho concentrates on the Permian. This makes Concho a less-diversified and riskier investment, but one potentially more rewarding than the others. Over the past year shareholders have indeed been rewarded, as Concho has returned 60%. Apache was the runner-up in this group with a 12-month return of 46%.

Occidental is the largest producer in the Permian Basin, with an estimated 270,000 barrels of oil equivalent (BOE) per day in 2016. However, most of this production was from conventional wells using the company’s enhanced oil recovery (EOR) techniques like carbon dioxide injection.

But when it comes to horizontal wells, Concho has been pretty consistently in the lead since 2013, with Pioneer Natural Resources (NYSE: PXD) recently challenging for the lead:

Other major Permian producers include Anadarko (NYSE: APC), Energen (NYSE: EGN), Shell (NYSE: RDS-A), Laredo Petroleum (NYSE: LPI) and Diamondback Energy (NASDAQ: FANG).

Chevron’s Legacy

Chevron ranks behind many other horizontal producers in the Permian, but it has a huge legacy position. Like Occidental, it has produced billions of barrels of conventional oil there and is pouring billions into the region to develop its 2 million net acres in the basin.

Chevron tallied up the value of its position in the Permian Basin in last year’s Q3 earnings report. Its holdings included:

• 600,000 acres in core areas where recent deals have been priced at more than $50,000 per acre (implying at least $30 billion of market value)
• 350,000 acres in areas going for about $20,000 to $50,000 per acre (perhaps $12 billion)
• 550,000 acres in areas going for less than $20,000 per acre (less than $11 billion)

That values the company’s Permian portfolio at as much as $53 billion based on the current valuations in the region. That’s equal to around a quarter of Chevron’s current market capitalization and more than the market cap of nearly every other Permian producer — including top dog Occidental.

Let’s Make a Deal

As Chevron’s Permian portfolio shows, the value of drilling rights in the Permian Basin can vary dramatically. Some areas are simply more rewarding than others for producers of oil and gas, and as a result they command higher premiums. That makes it hard to determine whether a given transaction is a “good deal” without detailed knowledge of that land’s output potential.

With that caveat in mind, there has indeed been a land rush in the Permian. Permian acquisitions in 2016 totaled $28 billion, with another $12 billion already slated to change hands in 2017. Prices have ranged from under $20,000 an acre to more than $50,000 an acre.

Here is a summary of some of the more recent Permian deals:

• February 2017 – Parsley Energy (NYSE: PE) announced it would acquire about 71,000 acres for $2.8 billion from Double Eagle Energy Permian ($39,000/acre), boosting its position to about 227,000 acres

• January 2017 – ExxonMobil announced a $6.6 billion deal for 275,000 acres from the Bass family ($24,000/acre)

• January 2017 – Parsley Energy announced a $607 million acquisition that added 23,000 net acres to Parsley’s Permian acreage ($26,000/acre)

• January 2017 – Noble Energy (NYSE: NBL) announced that it would acquire Clayton Williams Energy (NYSE: CWEI) for $2.7 billion, adding 71,000 net acres to Noble’s position in the core of the Southern Delaware Basin ($38,000/acre)

• January 2017 – Aggressive Portfolio pick WPX Energy (NYSE: WPX) announced that it would acquire 18,000 net acres in the Delaware Basin from Panther Energy Company and Carrier Energy Partners for $775 million ($43,000/acre)

• December 2016 – Callon Petroleum (NYSE: CPE) announced its acquisition of 16,098 net acres in Ward, Pecos and Reeves counties in Texas for $615 million ($38,000/acre)  

• December 2016 – Diamondback Energy (NASDAQ: FANG) announced a $2.4 billion acquisition of 76,319 net acres in Pecos and Reeves counties ($31,000/acre)

• November 2016 – Concho Resources announced that it had entered into an agreement to acquire 16,400 net acres in the Northern Delaware Basin for $430 million ($26,000/acre)

• November 2016 – Occidental announced that it had acquired 35,000 acres from private sellers in the Southern Delaware Basin for $2 billion ($57,000/acre)

• October 2016 – RSP Permian (NYSE: RSPP) acquired Silver Hill Energy Partners for $2.4 billion in cash and stock, adding 41,000 net surface acres in the Delaware Basin. Although the implied price is high at nearly $59,000/acre, the company noted in its press release that there are ~250,000 net effective horizontal acres across seven horizontal pay zones

• August 2016 – Pioneer Natural Resources acquired 28,000 acres in the Midland Basin from Devon Energy (NYSE: DVN) for $435 million ($15,500/acre)

• August 2016 – Concho Resources announced plans to acquire 40,000 net acres in the core of the Midland Basin from Reliance Energy for $1.6 billion ($40,000/acre)

• July 2016 – Diamondback Energy purchased 19,180 acres in the Delaware Basin from Luxe Energy for $560 million ($29,000/acre)

Finally, in a related note that is likely to drive even more acquisitions, in September 2016 Apache announced a huge new discovery of oil and gas in a largely overlooked part of the Permian. This discovery, dubbed Alpine High, is estimated to hold more than 3 billion barrels of oil and 75 trillion cubic feet of natural gas. Apache’s CEO has said that this discovery will transform the company, allowing it to drill as many as 3,000 wells on this position over the next two decades.

In Conclusion

I know that’s a lot of background information without delving into the financial metrics of these companies. My goal here was to better familiarize subscribers with the Permian Basin and recent deals in the area. Many of the pure Permian producers have yet to announce Q4 and 2016 annual earnings, so it would be premature to attempt a deep dive comparison at this point. Concho, Diamondback, Parsley Energy, Laredo Petroleum, and RSP Permian are all scheduled to release earnings this month, and after they do so I will take a close look at key metrics like reserves, production, debt and cash flow.

For now, our Growth Portfolio includes Buy-rated Apache, which has returned 16% since we first recommended it in August before the Alpine High discovery was announced. We also have a Buy on WPX Energy in the Aggressive Portfolio, and Growth pick EOG Resources (NYSE: EOG) is our #10 Best Buy.

We rate Chevron a Hold in the Conservative Portfolio, but its story is a lot bigger than just the Permian Basin. The company is positioned very well in the region but faces financial challenges.

The last time we screened Permian producers, in September, Concho appeared to be one of the more fairly valued. So we will be taking a closer look at it as well.