Permian Recovery Takes Fresh Form

Copyright © 2021 Energy Intelligence Group

Efficiency gains. Record drilling and completion rates. Doing more with less. Those phrases may harken back to 2016, when a surge in efficiency allowed the Permian Basin to more than double output in just a few short years. But they are also equally relevant -- and have new meaning -- in 2021. Permian producers have blown through peak productivity rates seen before the pandemic-led downturn upended the global oil industry. Oil output in the basin per active rig is up more than 35% since January 2020 and has doubled since late 2017, according to data from the US Energy Information Administration (OD Aug.16'21). There has been some pullback in these productivity rates in recent months as operators settle into higher -- and more sustainable -- activity levels. But they remain at levels that field managers and c-suites only dreamt about before. “I have to be honest -- our operations organization just continues to just surprise me,” Diamondback CEO Travis Stice said earlier this month. "I feel like we were already the best in doing what we do out here in drilling and completing these wells.” “I mean, every time we look to put [investor] slides together and we ask for new records that have been set, we're blown away,” lauded Jeff Alvarez, Occidental Petroleum’s head of investor relations. “I don't think that's going to stop.” The numbers back up the praise. Exxon Mobil says it can drill the same lateral feet today with eight rigs that it took roughly 25 to do just two years ago. It can also complete wells 50% faster. These improvements have led to a 40% decline in its drilling and completion costs in the basin since 2019. Diamondback slashed its 2021 capital budget by $100 million (6%) and will complete 10 fewer wells, yet bumped its oil output guidance up by 2% (OD Aug.3'21). Record efficiencies will let Oxy add two rigs in New Mexico and boost its well completion count for the year without budging from its extremely tight capital expenditure budget (OD Aug.4'21). A Matter of Necessity The US shale sector is long past the days of its eye-watering inefficiency, when drilling to secure vast and often incongruous leaseholds was the sole priority. But the magnitude of the efficiency gains made since early 2020 reflects more than just ongoing improvement; it speaks to the industry’s efforts to avoid catastrophe as oil prices collapsed to unheard-of levels at the height of the pandemic’s supply-demand imbalance (OD Apr.22'20). Faced with a need to keep the lights on and prevent runaway production declines while spending as little as possible, companies innovated -- and squeezed service firms on pricing. The price concessions won’t last forever, particularly as costs for labor, steel and other goods face deepening inflationary pressures. But the bulk of the efficiencies that have come as producers treat shale as a self-funding, returns-focused enterprise have staying power. This should make it easier for producers to balance multiple demands on cash flows, while operational efficiencies could help soften inevitable declines in productivity that will come as top inventories are depleted. Sustainable Shale The roughly doubling of oil prices since their late-October lows has unquestioningly been the industry’s biggest godsend over the past year. But newfound efficiency gains further augment the sector’s ability to transition to a more sustainable business model. Heightened efficiency means additional funds can go to service debt and shareholder payouts without necessarily compromising the crucial reinvestment needed to grow cash flows and restock drilling queues (OD Nov.13'20). It will also allow companies boasting some of the sector’s more battered balance sheets, including Oxy and APA (formerly Apache), to more comfortably stabilize their output. Notably, rig data from Enverus show that all of the leading public Permian producers are running just a fraction of their pre-Covid-19 rig counts, despite many firms being much larger now following a wave of consolidation (OD May14'21). Top Permian Operators by Rig Count Aug.15, 2019 Aug.15, 2020 Aug.15, 2021 Exxon 50 Exxon 18 Pioneer 24 Pioneer 39 Diamondback 14 Mewbourne Oil* 15 Diamondback 24 Pioneer 13 Devon 13 Occidental 23 Conoco 9 EOG 12 Chevron 22 Diamondback 8 Conoco, Endeavor* 11 Devon 20 Crownquest* 5 Occidental 10 Conoco, EOG 19 EOG, Chevron, GPK* 4 Diamondback 9 Endeavor*,

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