State of Shale 2023, Permian: The Juggernaut is Tested

By almost any measure, the Permian Basin delivers. The 55 counties in Texas and New Mexico that make up the Permian account for almost half—upward of 43%—the U.S.’ oil production. The basin’s market share is up almost 20% since 2013.

But the winds, as always, are changing and the “it’s cyclical” refrain is as evident now as ever.

At the end of 2019, the U.S.’ daily output hit 12 MMbbl, once again sustained by the 4.3 MMbbl/d produced in the Permian.

Indeed, it took a worldwide virus and its decimation of demand to slow the Permian’s trajectory.

But more than two years since COVID-19 upended commodity and global economies, demand is back.

Is the Permian back, too?

Producers that rolled back their growth—in part driven by positive demand signals, but also by shareholder demand—remain gun-shy about calling high-number production goals. Demand is heading upward, but the shareholder insistence for returns before growth is firmly in place. And as the mighty Permian nears its pre-pandemic production high, questions about its sustainability augment the conversation.

Supermajor Exxon Mobil Corp. is active in both the Delaware and Midland sides of the Permian, and production expectations were on target for 2022.

“Our production in the Permian Basin reached nearly 560,000 oil equivalent barrels per day, building on our strong growth from last year,” said CEO Darren Woods in November.

“In the Permian, one of the challenges there is over the years, what we’ve been doing is working really hard to make sure we’re maximizing the recovery of that resource,” Woods said. “Obviously, as we go through that, we’re optimizing and adjusting our development plans. That continues to be the case. So I expect this year, we’ll probably come in at about 20% up on last year’s growth, which was up 25% from the year before. So still very solid growth in the Permian.”

ConocoPhillips Co. cemented its position in the Permian in 2021 with its acquisitions of Shell Enterprises’ position in the Delaware Basin, which consisted of about 225,000 net acres, more than 600 miles of operated crude, natural gas and water pipelines and infrastructure, along with the purchase of Concho Resources, which owned assets in both the Delaware and Midland basins.

Nevertheless, the sentiment of slowing shale production prevails.

“Rapidly escalating costs combined with extremely tight supply are limiting the pace of industry-wide production growth,” ConocoPhillips CEO Ryan Lance said in an earnings call.

ConocoPhillips, the largest independent U.S. oil producer, forecast overall production growth of about 900,000 bbl/d this year but warned that gains would slow in 2023 on unrelenting oilfield inflation.

Delaware inflation

On the storied west side of the Permian Basin is the Delaware Basin’s 6.4-acre area, which reaches out from Eddy County in New Mexico to West Texas’ Pecos County. It is the deepest of the Permian’s sub-basins and holds the thickest rock, according to Enverus.

The top operator in the Delaware by production, the highly diversified EOG Resources, spoke frankly throughout 2022 about the impact of headwinds in the shale space, including mature wells and cost increases.

“Oilfield service capacity remains extremely tight and is further constrained by the limited availability of materials and experienced labor,” EOG COO Billy Helms told investors mid-year.  Those constraints fueled uncertainty in service costs, and he said the expectation is that they will continue to do so in 2023.

“These constraints are more concentrated in areas with the highest activities such as the Permian Basin,” Helms said. 

Conversely, the No. 2 producer in the Delaware, Devon Energy Corp., described “phenomenal” well performance in the play.

“This is an absolutely world-class asset,” Clay Gaspar, Devon’s operations chief, told investors in November. “We love the position we’re in. We love the scale that we have. The team keeps delivering. We’re still working on the efficiencies. We’re still applying technology, always trying to get a little better, a little smarter each day. No doubt about it. We have some inflation coming our way. So, there is some squeeze on the margin, but I would take this world-class asset and love having it in our portfolio.”

Devon’s current focus is in the oil-rich Wolfcamp, Bone Spring, Avalon and Delaware formations, according to company data. The firm’s operations in the Delaware provide both oil and natural gas production from a core acreage position of roughly 400,000 net acres across those formations.

Rounding out the top three Delaware producers is Occidental Petroleum Corp.

CEO Vicki Hollub said management remains “highly encouraged” by well performance in the Delaware.

“We delivered our best quarter to date for early well performance with the 46 wells online averaging peak 30-day rates of over 3,600 boe per day, demonstrating the superior quality of our inventory and subsurface expertise,” she told investors during a third-quarter earnings call,” she said. “And in the Texas Delaware, we recently brought online a new Silvertip well with the highest initial oil production of any horizontal well previously drilled in the Lower 48.”

A key independent producer, Occidental is also testing the waters of carbon capture and sequestration in the Permian. In August, that company first announced a plan to begin detailed engineering and early site construction for its first large-scale Direct Air Capture plant in Ector County, Texas, near Occidental’s portfolio of acreage and infrastructure that are conducive to safe and secure storage of CO2.

“The Permian location of our first direct air capture will provide us [with] multiple options to maximize the value of captured CO2. We have the ability to inject the CO2 into a saline reservoir producing CDRs [carbon dioxide removal] or to utilize the captured CO2 to produce net-zero oil from our enhanced oil recovery assets,” Hollub said. “Our conversations with many corporate partners and potential clients have highlighted the significant demand for CDRs generated through CO2 sequestration.”

One of the nation’s largest independents, ConocoPhillips, and supermajor Exxon Mobil round out the top five producers in the Delaware, respectively.

Fair to Midland

It might have originated as a British expression of ‘eh, I’m a bit better than okay,’ the oil patch took on the phrase “fair to Midland” and made it part of the lexicon. And it stands up today for the eastern side of the Permian.

Stretching north to south from Lamb and Hale counties to the top of Crockett County, the Midland Basin has been a hotspot since the 1940s, Enverus notes. The play took off in the 1970s and has intermittently been a key performer every time oil pops.

And each of the top five producers are at the top of their respective games, too. Pioneer Natural Resources Co. has reached the goal of CEO Scott Sheffield to become a basin pure play, and it’s paid off. Not only is the company the top producer in the basin, it is also a poster child for emission reduction ambitions across the industry.

Beyond the oil riches of the Permian, Pioneer intends to dig in for deep gas in 2023.The firm will test its deep Barnett and Woodford gas in the Midland to determine productivity, COO Rich Dealy said, during third-quarter earnings in October.

“We expect those wells obviously—they’re deeper—to be gassier, and we know we’ll find resource there,” he said, during a call with analysts.

“We just want to understand what that resource is. So we think it's worthwhile to spend some capital next year to test those zones and then we'll see what the productivity looks like and go from there.”

Mississippian-age Barnett and Woodford underlie the Permian’s popular oil targets—the Permian-age Wolfcamp and Spraberry—and are at depths up to more than 12,000 feet.

Coming in as the second-largest producer by volume in the Midland is the voracious Diamondback Energy Inc.. In 2022, Diamondback celebrated its first decade as a public company.

Diamondback Energy Inc. continued to add onto its position in the Midland portion of the Permian Basin with the acquisition of Lario Permian LLC in November in a cash-and-stock transaction valued at $1.55 billion.

In October, the company made its first acquisition since March 2021, reminding anyone watching that even one of the Permian Basin’s largest independents—the company was Texas’ second-largest oil producer in 2021—is constantly on the lookout for replacement inventory. Diamondback’s $1.6 billion deal to buy Firebird Energy in October follows a torrid M&A stretch for Diamondback in which, over two and a half years beginning in 2018, the company paid more than $13.7 billion for rivals QEP Resources ($2.2 billion), Ajax Resources ($1.2 billion) and Energen Corp. ($9.2 billion) among others.

“The challenge for public E&Ps in the M&A market is adding inventory while keeping the valuation on deals in line or less than their own cash flow multiples and free cash flow yields,” said Andrew Dittmar, director at Enverus Intelligence Research. “Diamondback appears to have just managed that.”

On the operations side, CFO Kaes Van’t Hof addressed portions of the firm’s growth strategy during a third-quarter call with investors.

“Our math tells us that we’re finding a striking a good balance here between [internal rate of return] and [net present value]. We may not have the highest oil per foot but certainly spacing wells a little tighter, as well as codeveloping more economic zones together and I expect that trend to continue to head our way,” he said. “I think we’re set up now for a few years of very solid development, particularly in the Midland Basin side.”

The third-largest producer in the Midland is privately held Endeavor Energy Resources. With its headquarters located near the action in the city of Midland, Endeavor employs more than 1,200 locals and is one of the largest private producers in the U.S.

Endeavor holds roughly 370,000 net acres in the six core Midland Basin counties, where it focuses its activity. Since 2016, the company has completed more than 900 horizontal wells. Management has said the firm has developed less than 10% of its current inventory, suggesting the room for growth is substantial.

Taking the fourth and fifth slots for the largest-volume producers in the Midland is supermajor Exxon Mobil and mega independent ConocoPhillips, respectively.