September 19, 2018 - 9:14 AM EDT
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How the Permian Basin Boom is Causing US Land Prices to Skyrocket and Canadian Oil Prices to Plummet

Thanks to a boom of activity in the Permian Basin, a prolific oil play that runs beneath west Texas and southeast New Mexico, it appears that the United States may already have surpassed both Saudi Arabia and Russia to become the world’s biggest oil producer. The ramifications of this recent surge have been felt both within and outside of the US’s borders.

Domestically, the impact has been a windfall for states such as in New Mexico which just broke its own record at the most recent Permian Basin lease auction. Held by the Federal Bureau of Land Management (‘BLM’), the auction’s gross haul topped $967 million in sales in just one week—a sum that more than tripled the total dollars bid on all federal onshore lease auctions held during all of 2017.

But the boom for the US has been an utter disaster for the country’s neighbors north of the border. Canadian crude prices collapsed as the supply glut in Alberta grew even larger, as its largest buyer in the US has seen demand for Canadian products decline substantially. Even light sweet crude plunged from a US$5 per barrel discount to a US$16 discount to WTI.

The Permian boom has become a major feature for oil and gas players, including US-based companies Apache Corporation (NYSE: APA), Lilis Energy, Inc. (NYSE: LLEX), and Occidental Petroleum Corporation (NYSE: OXY); and Canadian companies Encana Corporation (NYSE: ECA) (TSX: ECA), and Permex Petroleum Corporation (CSE: OIL).

While the region has seen companies come in at different stages of its popularity, the results of the latest BLM auction is very telling of the direction the industry is heading. Roughly spanning the last 8 years, oil producers who already held leases in SE New Mexico have successfully tested the same shale formations that underlie West Texas for their potential productivity. Just like in West Texas, the pace of discovery across the Permian basin has escalated rapidly over the past two years.

The result was this latest BLM lease sale raising the average per-acre lease bid to an unprecedented $95,000 per acre. For the companies that staked out their parcels long ago, the bonus of value is quite substantial.

One early-bird example is Canadian small cap Permex Petroleum. The relative newcomer stealthily accumulated a very respectable 6,500 acres of oil and gas holdings across the Permian, acquired for an average price of less than $2,000 per acre—3,850 acres in West Texas and 2,650 acres in southeast New Mexico.

Now with plenty of opportunity to economically and steadily increase production, Permex is in a unique position. Surrounded by a group of majors that includes Apache and Occidental (who Permex has a partnership deal with), it seems that the value of parcels such as Permex’s are on the rise across the entire Permian region.

PERMIAN OPPORTUNITIES IN MOTION

Apache Corporation (NYSE: APA)

Way ahead of the curve, Apache began in 2016 quietly picking up acreage in an area of West Texas called the Delaware Basin, a subset of the large Permian Basin shale formation. Since there was relatively little attention being paid to the region at the time, Apache was able to amass some 300,000 acres at the bargain price of just $1,300 per acre. Thanks to diligent and extensive testing, Apache stunned the energy world with its findings in the area. Initial testing indicated that there were at least 3 billion barrels of oil and 75 trillion cubic feet of natural gas under its play. Now Apache is investing in Kinder Morgan’s Permian Highway pipeline, which will transfer up to 2 billion cubic feet of natural gas per day from the Permian to the Gulf Coast.

Lilis Energy, Inc. (NYSE: LLEX)

Earlier this summer, mid cap Lilis Energy shifted its headquarters to Houston. Only three years ago, Lilis was based out of Denver, and teetering on the edge of bankruptcy. After avoiding bankruptcy, Lilis sold off its Colorado holdings, and shifted its focus to the Permian Basin. The company bought up acreage at low prices during the energy bust period. Today, Lilis is valued at over $334 million, and considered to be one of the best-positioned small Permian players.

Occidental Petroleum Corporation (NYSE: OXY)

With a total combined production in the Permian of roughly 354,000 boe/d, Occidental is the largest operator in the Permian Basin. Oxy got into the region back in 2000 when it acquired then Texas’ largest oil and gas producer, Altura Energy. Last year, Oxy paid $600 million to acquire more wells from Hess Corp. in the Permian, and recently partnered with small cap Permex Petroleum possibly giving an opportunity to pass the torch of knowledge. Oxy now controls approximately 2.5 million net acres in the prolific shale play, and through enhanced production method has made improving production in the Permian somewhat of an art form.

Encana Corporation (NYSE: ECA) (TSX: ECA)

A recent call from Merrill Lynch gave Canadian energy player Encana an upside of almost 60%, noting an infrastructure advantage and rising free cash flow. Encana is seen as a multibasin play, with its exposure not only to the Permian, but to Montney, Duvernay, and Eagle Ford operations. What Merrill Lynch liked the most about Encana was its experience, and ability to lower costs. Encana has been able to enhance operational efficiencies to levels that are industry leading, including recording one of the lowest well costs per thousand lateral feet in the Permian.

Permex Petroleum Corporation (CSE: OIL)

Like Apache, Oxy, and Lilis all listed above, Canadian small cap Permex quietly accumulated a very respectable land base in the Permian Basin for pennies on the dollar before the region’s boom began. By targeting divesting companies that were deep in debt, or close to going bust, Permex amassed a series of assets across 6,500 acres of Permian acreage. The parcels came with several wells primed for re-entry, stimulation, and other forms of enhanced oil recovery. Since establishing itself in the region, Permex managed to sign a WI partnership deal with major Occidental. Permex is now set on increasing production through a gradual two-phase strategy.

PERMIAN LAND VALUE BONUSES

For newcomers and late joiners into the Permian Basin land rush, New Mexico’s record breaking BLM lease auction presented a high-cost, high-reward entry into the hottest petroleum play the US has seen in quite a while.

But for the early birds who already have their real estate staked out, the surging prices only confirm their prescience to buy low when you still could.

There’s hardly a better example of an early-mover advantage than Permex Petroleum Corporation (CSE: OIL), which quietly acquired its Permian assets across the basin in west Texas and New Mexico back before the rush began. While still only valued at less than $15 million in market cap, Permex swooped in and now has 6,500 acres, with approximately 9 million barrels in 2P reserves.

At $60 WTI prices, the reserves alone are worth just north of $150 million USD. However, now the company has an opportunity to leverage its land position to possibly divest when necessary to raise capital for its drilling and completion goals.

Take for instance Permex’s New Mexico acreage, which totals 2,650 acres. The New Mexico lease auction saw an average per-acre price of $95,000 paid out. Now, not all land is valued equally, however the $95,000 is the average.

From a conservative basis, if one took half the average value ($47,500/acre) and applied it across the company’s 2,650 acres, Permex’s land alone in New Mexico would today be worth nearly $126 million. Even at a quarter of the value, Permex’s land in New Mexico alone would be worth roughly $63 million.

For a company that’s current market cap is just over $14 million, with its New Mexico land value $125 million Permex has still not gotten the market to take notice—this is without counting the other 3,850 acres of acreage the company holds in the Permian.

Now in order to steadily improve upon its assets, Permex has begun its re-entry and stimulation program on shut-in wells in a very economic fashion. Permex President and CEO Mehran Ehsan details this approach by stating, “Our approach is to simultaneously target our lowest hanging fruit to add marginal production, while developing our horizontal plays for scaled production.”

Should the need arise to seek out additional developmental funds, Permex now has an ace up its sleeve with its land position. While the BLM leases were all on exploratory lands, Permex’s lands have proven reserves, and some production as well. If needed, Permex could divest pieces of its land position, to ramp up its operations—For the price in the Permian is indeed enticing at this time.

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Source: Livemoney (September 19, 2018 - 9:14 AM EDT)

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