Discussing the prolific Permian Basin from their generational perspective with Scott Sheffield and Bryan Sheffield, CERAWeek by IHS Markit Chairman Dr. Daniel Yergin asked if these father-and-son owners of two of the Gulf Coast’s most successful exploration and production companies see elements of a “Permania” bubble.
“Or do you think different benches justify it?” Dr. Yergin asked the Sheffields at the recent IHS CERAWeek by IHS Markit.
“When you have 12-16 benches in the Permian, if the service companies can figure out how we can drill six or eight at one time and frack them all at once, it’ll take the Permian to another level we won’t believe,” said Scott Sheffield, executive chairman and CEO of Pioneer Natural Resources. “Instead of growing 500,000 barrels a day per year, it could easily grow a million barrels a day per year, because the resource is there.”
Regarding pricing, Bryan Sheffield, chairman and CEO of Parsley Energy (and Scott’s son), observed that at a $100 price for one barrel of oil, the price ranges from $30,000-$50,000 per acre.
“I saw many transactions closer to $50,000 an acre,” he said. “What is amazing is between $40,000 and $50,000 oil, we are seeing the same exact price per acre. Why is that? It is because service costs are basically cut in half and are more efficient.”
Bryan strongly believes this pricing does not reflect a bubble because “there is so much optionality for the investors and for even the private companies.”
“The price per acre could continue,” he said. “Now, you could add as many rigs as you wanted. The price break would just shoot up and skyrocket from here, I think. But it is about how many rigs you can add, and that might keep the prices capped at the $50,000 mark.”
Prediction and preparation
Scott believes the Permian is going to be “a big supplier to the world” over the next several years and noted Pioneer has been fortunate to establish a position in the Permian on a zero-cost basis.
“We are unique,” Scott said. Pioneer analysts forecasted the Permian would produce as much as 5 million barrels a day in 2014, despite other analysts predicting the basin would produce a similar number of barrels by 2021.
“But if you take our 10-year model and expand it through the rest of the Permian, you can easily see 8-10 million barrels of oil per day out of the Permian by 2027,” Scott said. “So the efficiency gains and the great productivity are over two times better than in 2014.
“When I look at our economics for 2014, we all said we need $60 oil to really grow the company. Today, you can grow the company at 5 percent at $40 oil. But at $55 oil, which is about the 10-year strip, Pioneer is growing the Permian at over 30 percent per year.”
Scott reminded delegates that despite the almost universally predicted optimistic future of the Permian Basin, it is impossible to predict when oil prices are going to collapse.
“There have been over 100 bankruptcies, as you know — $75 billion in bankruptcies — already in the United States and Canada these last three years,” he said. “I would think people will run a lot tighter ship over the next several years because of this last downturn — until they forget. “People do forget. They start believing in $80 oil or $70 oil. But something I firmly believe is that everybody should think that there is going to be a downturn around the corner. Always be prepared.”
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