Permian Basin 2018

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PERMIAN BASIN: MIDSTREAM | October 2018 | 53 increased output by private operators—wasn't being given as much investment-market attention. "I think some operators also thought that way," Chandra said. "They didn't think the overall group would be able to generate such high amounts of oil growth out of the basin in 2018. The mindset, if you recall, was the U.S. supply-growth numbers are too strong. They're artificial. They're going to get revised down. It can't be 'happening.' "And, then, it became one of no revisions [after all]. In fact, the possibility of upward revisions to U.S. oil-supply growth is very strong. 'There is no end in sight.' That happened fairly quickly," Chandra said. So operator A didn't think operators B-Z would actually show up? And B didn't think C-Z would show up? "Yes, and the privates, the PE-backed, the integrateds, right? So I think, by the first quarter, it became clear U.S. oil supply growth was not going to be de-rated in any way." Production phenom In the first half of 2017, Michael Hanson posed a question: "What if everyone does what they say they will do?" At the time, Permian output was 2.2 MMbbl/d. Hanson, a founding member of invest- ment banker Parkman Whaling LLC, went to work on the math. The results: Mid-2018 Permian pro- duction would be at least 3.2 MMbbl/d. In late June, Permian production was 3.2 MMb- bl/d. At the same time, Permian takeaway and in-basin refining capacity was about 3.2 MMbbl/d. Jean Ann Salisbury, senior analyst for Bernstein Research, and colleagues Bob Brackett and Dave Vernon gathered some slides in late May to explain the phenomenon to investors and hedgers. Salis- bury said, "We had expected this [would appear] in the second half of 2018—that you would outpace pipeline capacity—but it happened a bit earlier than we thought for a couple of reasons." One of her charts showed the number of new Permian wells. "But, more importantly," in the other chart, "you can see that the average well in the Permian just keeps getting better," Salisbury said. Recent results include two Devon Energy Corp. wells in its Boundary Raider development in the Delaware Basin. These IPed earlier this year with a combined 24,000 boe/d, 80% oil. John Raines, Devon vice president, Delaware Basin business unit, said at Hart Energy's DUG Permian confer- ence in May that the company may have two more company-record Delaware wells. As for EOG Resources Inc., J.P. Morgan Secu- rities LLC analysts wrote in a note that the pro- ducer's Convoy-pad results in New Mexico "rival" Devon's Boundary Raiders, which, they added, "are clearly the best wells in the history of the Dela- ware Basin." EOG's six Convoy wells averaged some 5,600 boe/d, 76% oil, for a combined 33,000 boe/d from completions in May. In summarizing the Permian's oil potential, Bill Marko, managing director for Jefferies LLC, pointed to a 20,000-acre development in the north- ern Delaware, for example. "This is why the Perm- ian really matters," he told members of the M&A group ADAM-Houston this summer. "On current spacing, the recovery factor is 3.2%," he said. "If you talk about really tight well spacing and being able to produce all nine benches, you've got a 17.6% recovery factor [with original oil in place of 29.3 billion—yes, billion— barrels]. … This is why everyone is so excited about the Permian." Flashpoints Bernstein's Salisbury, in her client call, said that, while the market may have been expecting 3.2 MMbbl/d from the basin in the latter part of this year, there isn't significant takeaway scheduled to come online until 2019. "E&P didn't really under- write new pipelines for all of 2017," she said. KeyBanc Capital Markets Inc. analyst David Deckelbaum noted that this has happened before in this new century of Permian production: "Throughout early 2015, the Midland differential was over $10/bbl as production exceeded takeaway capacity and began to narrow down in [the second half of 2015] as capacity expansions kicked in." In early June, Brent was +$10/bbl to West Texas Intermediate (WTI) Cushing, and WTI Midland was -$12/bbl to WTI Cushing. "Midland is a whop- ping $22/bbl off Brent," Tudor, Pickering, Holt & Co. (TPH) analysts summarized. How bad is it? Greg Haas, director of integrated oil and gas for research firm Stratas Advisors, told

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