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Permian Production to Reach Yet Another High As Oil Zooms

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According to the U.S. Energy Information Administration’s (EIA) latest Drilling Productivity Report, oil output in the Permian Basin will surpass 5 million barrels per day in February. The agency forecasts that crude volumes from the western part of Texas and the south-eastern part of New Mexico will go up from a record 4,996 thousand barrels per day (Mbbl/d) in January to 5,076 Mbbl/d next month. The projected production figure for February would be a new high for America’s biggest oil field and reflects the steady addition of rigs. As proof of improvement in activity, the rig count in the Permian Basin has risen to 293 from an all-time low of 116 in August 2020.  

As far as combined U.S. oil supplies from seven major shale formations (Anadarko, Appalachia, Bakken, Eagle Ford, Haynesville, Niobrara and Permian) is concerned, EIA expects it to increase from 8,436 thousand barrels per day (Mbbl/d) in January to 8,540 Mbbl/d in February.  As crude prices hover around the $85-barrel level, production is expected to increase in five of the seven unconventional plays, with the largest gain of 80,000 barrels per day happening in the Permian Basin.

The effects of strong oil prices can also be seen in the number of wells that are being drilled but not completed, or wells that could be turned on at short notice. The EIA said that the number of such wells declined by 214 over the past month, with 91 of those in the Permian.

Experts say that it’s cheaper to drill and complete oil wells in the Permian Basin as compared to most other major fields. Moreover, there are certain parts of the shale play whose well-returns are the best in the U.S. Permian’s attractive economics. This means that producers can make money and sustain growth there at the current price. According to estimates, the average breakeven prices in most of the Permian well locations is below $50 per barrel — the lowest in the United States.

It’s not surprising that the United States’ top energy moguls have renewed their focus on the largest U.S. shale play. The likes of ExxonMobil XOM, Chevron CVX and ConocoPhillps COP are placing long-term bets on the Permian Basin to take full advantage of the commodity upcycle.

ExxonMobil continues to invest heavily in the low-cost play. The company recently unveiled its plans to spend between $20 billion and $25 billion each year out to 2027. Along with offshore Guyana developments, XOM will allocate the lion’s share of the budget toward Permian.

At the third-quarter end, to Zacks Rank #1 (Strong Buy) ExxonMobil produced 500,000 barrels of oil equivalent per day in the Permian Basin, which comprised more than 40% of its total production in the United States. XOM has a strong presence in the prolific area, where it continues to lower its fracking & drilling costs.  

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Chevron, meanwhile, announced that for 2022, it intends to spend $4.5 billion on shale, with the largest part (or $3 billion) going to the lucrative Permian Basin of Texas and New Mexico alone. In fact, CVX’s existing project pipeline is among the best in the industry, thanks to its premier position in the lucrative play.

Driven by robust output in the showpiece region, Chevron's U.S. volumes during the first three quarters of 2021 increased some 10% from the year-earlier level to 1,113 thousand barrels of oil equivalent per day. CVX currently holds approximately 2.2 million net acres in the Permian — primarily in the prolific Midland and Delaware basins.

Another big U.S. company ConocoPhillips' Permian footprint has expanded significantly over the past year, culminating with the recent purchase of 225,000 net acres in the core of the oilfield. The acquisition added 200,000 barrels of oil equivalent per day of production to COP’s portfolio, putting it just behind ExxonMobil to become the second-largest hydrocarbon producer in the Lower 48.

To further frame the Permian's importance for ConocoPhillips, COP expects a company-wide capital expenditure of $7.2 billion in 2022, including $700 million associated with the Permian asset acquisition.

In conclusion, crude production in the Permian Basin — the lowest-cost shale region — seems to have taken off with commodity prices stabilizing within the range of $75 to $85 a barrel. As major operators hit the accelerator on drilling activity, the region is set to experience significant gains in oil production next year, taking it past the pre-pandemic levels.

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