Nissa Darbonne, executive editor-at-large, Hart Energy: Hi, thank you for joining us. I'm Nissa Darbonne, executive editor-at-large for Hart Energy. We're visiting now with Dan Pickering. Dan is chief investment officer for Pickering Energy Partners. Dan just spoke at Executive Oil Conference here in Midland. Dan, thank you very much for joining us.

Dan Pickering, chief investment officer, Pickering Energy Partners: Good to be here.

ND: One of the conversations that we had on stage just now was concerning, well, two really. One concerning inventory and one concerning M&A, but really one is driving the other. So where are we with Permian Basin "next" inventory? What do we have and where are we going?

DP: Yeah, it's a great question and it's kind of "the question" right now. So if you look, I think we've seen a ton of M&A over the last two years, and I think there are three or four factors. Inventory, first and foremost; size and scale—companies want to be bigger—and then value, things are pretty inexpensive.

The real driver here [is] inventory, though. Folks are getting concerned that they might not have enough kind of core acreage, and we wouldn't see the acquisitions and the M&A if that weren't the case, right? People are speaking with their actions. Talk to folks and the view is, at $70 oil, you've got three to seven years worth of inventory in the basin.

And so I think the companies are trying to shore up and make sure they're above average, not below average. That's driven a lot of activity. I think the basin's maturing. We've got a lot of wells left to drill. There may be an upward creep of costs, which is probably going to translate to an upward creep in pricing over time.

But inventory, I think is on the mind of every energy executive these days out in the Permian.

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ND: So further towards inventory, let's just take Wolfcamp for example, Northern Midland Basin Wolfcamp. I mean, have we really settled in on what's the optimal spacing and numbers of laterals in different formations? I mean, I feel like we could probably put a lot more laterals in the Wolfcamp in each DSU.

DP: I think the industry's continuing to learn and get more efficient. It kind of amazes me at how effective the industry's been able to--I mean, rig counts trended lower and production's trended higher, so we're getting better every day. So that answer, the optimum answer is probably changing on an ongoing basis.

I think that at this stage of maturity for an existing formation like the Wolfcamp that there are pretty good rules of thumb and what it's going to take. There are more wells to drill there at higher prices. It's all a function of price. And so I think that we're not going to downspace in some of these mature benches unless you've got triple-digit oil prices, and I think that's still a ways away sustainably.

And so I think folks have settled in on a pretty good recipe, plus or minus 10%. It's not—the error bars aren't big right now.

ND: And then we'll just go ahead and address natural gas too—not Permian associated gas, but natural gas, particularly the Haynesville and Appalachia. Clearly they're not running out of inventory. What are you seeing in terms of potential for M&A in the Haynesville play and in the Appalachian Basin?

DP: Sure. In gas, step back and do the big picture. A lot more oil M&A than gas M&A in the last two or three years. Folks view oil prices as pretty much in the zone, $70 plus or minus. Gas has this upward sloping price curve, $2.75 now, $3.75 in the future. Who wants to be the seller today?

So I think that as we get closer to turning on these new LNG projects, we'll see a more normal and flattish gas curve, and when we do, we'll see more M&A.

Haynesville is the hottest spot in the country because it's so close to all of the export capacity that's coming online. And so I think we'll see a lot of drilling in the Haynesville as the LNG projects start to turn on.

And then you go to Appalachia, fabulous economics up there, [but] capacity constrained in terms of getting gas out of the basin. And so that feels like it's a little more--maybe the new administration's going to make it easier to get gas out of the Marcellus.

But the Haynesville continues to be, I think, a focus area for the industry just because of access to those waterborne exports.

ND: Thank you. Thank you very much, Dan. Appreciate it.

DP: Great visiting with you.

ND: And thank you for joining us. Stay tuned for more actionable energy intelligence right here at hartenergy.com.

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