Virtual DUG Day 1: Permian Basin Relevancy Faces Bumpy Ride Ahead

The Permian Basin is celebrating its 100th year of crude oil production. What a year it’s been. Who would have thought century mark would be a test of resiliency? But, considering the history of the basin, it seems strangely fitting when you think about it. 

Hart Energy kicked off its DUG Permian Basin and DUG Eagle Ford Virtual Conference on Sept. 29 with a full day of on-demand sessions focused on the Texas shale plays. Day one centered on the venerable Permian as more than 4,000 registrants were expected to view the sessions.

The COVID-19 pandemic certainly took a toll on the Permian Basin. Matt Fox, executive vice president and COO of ConocoPhillips Co., joined the conference to discuss the major’s plans going forward after dealing with the demand destruction of 2020. Indeed, the industry and the world has been radically altered since March, he said.

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It’s hard to argue with the largest economic contraction 70 years.

For ConocoPhillips, Fox said that its U.S. curtailments helped crude stocks avoid reaching tank tops. He said the company also shut-in production in Canada during the year. “In June, we had more than 400,000 barrels per day curtailed. That’s a third of our worldwide production,” he said.

For perspective, that more production than Norway, Mexico and Malaysia shut-in, combined. So, there were tough decisions to be made at ConocoPhillips’ headquarters this year. 

“Our basic thought was we can produce it now and get [less] per barrel or we can produce it later and get, let’s say, $50,” Fox said. “Does it make economic sense to do that or not?”

He admitted that some companies under contractual constraints might not be able to reach the same decision. He also advised that operators need to have a strong balance sheet to withstand the deferred production.

Asked by Oil and Gas Investor Editor-in-Chief Steve Toon about ConocoPhillips’s balance sheet and the impact of the moves the company made a few month ago Fox said, “We entered the downturn with approximately $8 billion on the balance sheet and we’ll exit with something around $6 billion or $7 billion.

“Having that balance sheet strength was extremely important, especially when we went through the really dark days,” he continued. “Having that gave us the ability to curtail production. Had we not curtailed production we could have gotten probably $25 per barrel. But we chose to defer that.”

Why you need to endure with relevance

David Dell’Osso, executive vice president and COO of Parsley Energy Inc., delivered the day’s second operator keynote. Parsley is a Permian pure-play and Dell’Osso said the company is set up well for the future despite the difficult market. 

“We have a strong balance sheet with hedge protection, which in a market like this is very important,” he said, adding that the company has no near-term debt maturities. “We do have a very long runway of re-investment opportunities in the form of core inventory in both sub-basins [Midland and Delaware]—none of which is on federal land.” 

Despite the headwinds in 2020, Dell’Osso said Parsley was actually able to increase dividends.

He went on to discuss the importance of building sustainable business models that can build and sustain free cash flow. He also discussed what Parsley calls the “Shale New Deal,” which focuses on perception, pollution and profit.

“The landscape of what challenges and opportunities each company has looks different, but if we can continue as an industry to focus on and lean into these three tenets our industry’s future and our country’s future will be better for it,” he said.

Buckle in for a bumpy ride

Dan Pickering joined the conference to highlight the trends in the market. If you’re looking for $50 oil prices, he said you better plan on waiting a while. 

“It’s going to late ’21, early ’22 before we see $50 WTI,” he said. “We just have to work through all of these excesses and the recovery on the demand side is going to take some time. It’s a 2022 event, which means we slog for the next year or so.”

He said the industry’s relentless focus is on costs because “it’s the only thing the industry can control.”

“That is allowing activity to creep back at $40 oil,” he continued. 

He expects bankruptcies to continue.

On the consolidation front, he believes it will be one-off in nature. “It will be specific to a situation not a wide-scale activity,” he predicted. 

He added that deals are slow but “if you have producing cash flows there is activity and there is value.”

He pointed to the minerals space where deals have started to happen and “we’ll see it around producing assets.”

You can view all of the DUG Permian Basin and DUG Eagle Ford session on-demand with a complimentary registration at https://bit.ly/3l1pRFP.