Generally speaking, it’s fair to say the mood of the industry is optimistic as the Oil Price Spring continues a slow bloom, certainly a stark contrast to the dire, serious, resilient attitude that took root the past couple of years. Undoubtedly, the buzz exuded at Hart Energy’s recent DUG Permian Basin show in Fort Worth, Texas, seemed like old times—say, 2014. Of course, the topic of conversation was the Permian Basin, the most active oil province in the world currently. What’s not to get excited about?

Let’s be honest: while other U.S. unconventional resource basins are gradually gaining in economics on relatively stable oil and gas prices and hard-earned efficiencies, many remain underwater or barely above the economic water line. The Permian, however, towers above the floodwaters as an island of robust rates of return.

Half of all drilling in America today takes place in the Permian because it is an economic safe haven. The Permian Basin is the industry’s happy place. And why not? Consider what Seaport Global Securities’ Mike Kelly had to say at the conference. Kelly posed this question: What is the actual intrinsic value of a Permian acre worth?

Well, for 10,000 acres with one rig running, each drilling 750,000 barrels of oil equivalent (boe) EUR wells for $5 million each at $55 oil, one Wolfcamp zone warrants a value of $32,000 per acre. But, consider the same 10,000 acres with four rigs targeting four zones, drilling 1 million boe EUR wells at the same well cost and oil price, then the story changes. A lot.

“It’s worth over $223,000 per acre,” proclaimed Kelly. That’s a quarter of a billion. For just four zones (albeit four highly productive zones).

“If you do ultimately see this play out and you have four-plus zones, you can justify a lot higher price than what is being paid [for acreage] today.”

Kelly acknowledged the valuation is “banker math” assuming the wells get drilled and the price holds steady, and that buyers would have to buy cheaper than that with a heavier risk factor “until Netherland Sewell blesses that 1 million barrels is norm on those zones.”

Nonetheless, even if the valued number is merely $180,000 per acre, “there is justification for people to pay $30,000 to $40,000 per acre because there is a line of sight to something greater than that.”

Some old Permian dogs say “no way” to paying $40,000 an acre, said Kelly. But Parsley Energy Inc., Callon Petroleum Co., Diamondback Energy Inc. and RSP Permian Inc. fight to be in the front of the line to do just that. With good reason.

So far they have been proved right, he said. “Their stocks haven’t depreciated one bit. The market has latched on that it’s worth every penny they’re paying. I feel pretty comfortable with companies paying market rates for these A&D transactions.”

In particular, RSP Permian. How can RSP justify paying $50,000 per acre in Loving and Winkler counties, Texas, vs. $30,000 an acre others are paying further south in Pecos County?

“First and foremost, you’ve got to get high-quality acreage that is consistent,” Kelly said. “Don’t worry about the delta between $30,000 and $50,000. Make sure you have 10 years of visible inventory that is 1-million-barrel-type quality. Because there is such a delta between what the ultimate value could be and what they’re paying today, you’ve got to have tier one quality.”

Speaking at the IHS Markit’s CERAWeek conference a few weeks prior, Maynard Holt, co-president and head of E&P investment banking for Tudor, Pickering, Holt & Co., said everybody recognizes that the Permian is expensive to get into, but that it offers a very nice risk-adjusted bet that he doesn’t see going away anytime soon.

“If oil goes back to $80, why buy premium real estate?” he posited. “Buy the cheapest stuff on the planet that will get the best return. But let’s say oil goes to $40. If you pay a premium for the Permian, you’ll still do fine. In those other assets, you’ll do great if the world recovers; you’ll lose everything if it doesn’t.

“I would hate to bet against the Permian.”

Pioneer Natural Resources Co. executive chairman Scott Sheffield, also prognosticating at CERAWeek, anticipates that efficiency gains and rig productivity will lead to the Permian producing some 8 million to 10 million barrels of oil per day within 10 years and 20 billion cubic feet of associated gas per day as well. And that’s just scratching the surface, so to speak.

“We’re only going after two to three benches. When you have 12 to 16 benches that we can go after in various price environments, if the service companies can figure out how to drill and frack them all at once, that will take the Permian to a level we won’t believe.”

My math shows close to a million an acre. And if you’ve got Permian acreage, that’s a happy place indeed.

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