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Four Ways to Play the Permian Basin Oil Boom

by | published September 14th, 2014

They called the Permian Basin the mother of all busts and buried it three decades ago.

Thanks to an oil glut, the market crash of 1982, and a downturn that chased most of the major energy companies out of the region, banks went bust and one-time oil barons became car salesmen.

Oil fields turned to cotton farms, and oil rigs were left to rust.

“In 1983, they thought the oil industry in Texas was done,” recalls Doug Robison, president of the Permian Basin Petroleum Association.

They couldn’t have possibly been more wrong…

The First Texas Oil Boom

Oil was discovered in the Permian Basin by accident. Ranchers and farmers seeking water, often struck oil instead. Commercial oil wells were first drilled in 1921, and the Texas oil boom was on.

In the Permian Basin, the good times rolled. Ranchers and farmers sold their land to energy companies. Wildcatters drilled in every promising spot along a 300-mile swatch that stretched through Texas and New Mexico.

And then the bottom fell out.

The price of oil, which had inched up to $34 in 1980, fell to $10 within four years due to rising supplies and falling demand. New federal environmental regulations, such as the Clean Air Act, made drilling and processing oil more costly.

Capital for oil exploration and extraction dried up. Drilling collapsed. Jobs disappeared.

It would be almost two decades before the black gold began flowing from the Permian Basin again.

The Permian Basin Oil Renaissance

According to the U.S. Energy Information Agency (EIA), the rock formations in the Permian Basin differ from most other potential oilfields, in that oil-bearing rocks are stacked in layers. Because of that, conventional, older vertical wells were inefficient at extracting the oil, and traditional techniques could only pump a fraction of the oil.

It took the invention of hydraulic fracturing, or fracking, to make the Permian Basin a rich source of energy wealth once again.

Fracking, which uses water, sand and chemicals forced into horizontally drilled wells under high pressure to extract “tight” oil from rock, works exceptionally well in the Permian Basin.

It led to the second Permian Basin oil boom.

Today, according to Professor Bradley Ewing of Texas Tech’s Rawls College of Business, 27 percent of all of the oil rigs in the United States are currently operating in the Permian Basin, the largest concentration of oil rigs anywhere in the world.

Production has soared. The EIA says the basin produced 1.35 millions of barrels of oil per day in 2013. That could double within the next 10 years, say analysts at ITG Investment Research, while the Permian Basin Petroleum Association believes that figure could come close to tripling.

That skyrocketing crude oil production has pushed the Permian Basin to the top position as the leading oil producer in the country, outpacing both the Eagle Ford (also in Texas) and the Bakken (primarily North Dakota).

daily oil production

The Permian Basin’s potential seems almost limitless.

Here’s how investors should play it.

Investing in the Permian Basin

The Permian Basin has been a tremendous source of wealth, not only for the energy companies that operate there, but investors who’ve recognized the basin’s potential.

Had you invested in the 11 companies that have had significant oil or gas drilling operations in the Permian Basin for the last 10 years, you would have achieved an eye-popping return of 417.94 percent, five times better than the Dow or the S&P 500.

And with new production records being set almost monthly, there’s every reason to believe those big gains will continue.

Although several major energy companies have operations in the Permian Basin, the greatest opportunities are in the smaller companies that exclusively or primarily depend on the Permian for their profits.

Here are four of them:

Athlon Energy (NYSE: ATHL) went public in August of 2013, and has been on a tear since, up 52.95percent. The company more than doubled its sales in the last quarter, notching 109 percent sales growth to $136.5 million from its 140,000 acres in the Permian Basin.

There’s every reason to expect that growth to continue. The company’s daily production has more than doubled to 25,000 barrels of oil equivalent per day (boe/d), and its three latest wells are all producing above-average yields. Earnings per share are up 59 percent quarter-to-quarter from last year, and because the company is currently drilling in low-risk areas that trend should continue.

Big investors and analysts are starting to notice. Fund ownership has accelerated for three quarters in a row, from 165 funds at the end of Q3 2013 to 256 at the end of Q2 2014. Analysts have a one-year price target of $55-$64. That’s an upside of 22-43 percent from the current $44.75.

Cimarex Energy (NYSE: XEC) has some operations in Oklahoma, but the bulk of its activity is in the Permian Basin. Management certainly knows where the money is: the company is in the process of selling $326 million in oil and gas assets it owns elsewhere, so it can concentrate its efforts in the Permian Basin.

Investors have applauded news of the sale, driving the stock price up 35.24 percent this year, a continuation of a trend that has seen the stock post eye-popping gains of 220.24 percent in the last five years.

The company’s other numbers are equally impressive. Natural gas production averaged 839 million cubic feet equivalent (MMcfe) per day in the second quarter, a 22 percent increase over 2013. Oil production jumped 13 percent over the same period last year to 41,759 barrels per day, with three quarters of that coming from the Permian. The company expects oil production to grow by an additional 22-25 percent by the end of the year, thanks to 46 wells that are awaiting completion.

Concho Resources (NYSE: CXO) has 22,000 potential drilling locations on 1.2 million acres, a key reason why the company expects to double its production of 101.6 thousand barrels of oil equivalent per day (MBoepd) by 2016. The company recently entered into agreements to acquire 91,000 additional acres.

Over the last five years very few Permian Basin stocks have even come close to Concho, which has skyrocketed 271.72 percent during that time. This year has seen that momentum continue, with the stock up 27.94 percent year-to-date.

With a track record of double-digit year-over-year growth in production and revenue, and vast portfolio of untapped drilling locations, Concho Resources is perfectly on track to reach its aggressive production growth goals. The stock, no doubt, will follow.

Diamondback Energy (NASDAQ: FANG) went public at the end of 2012, and its stock has exploded by 338.86 percent since then, jumping by 50.12 percent this year alone.

Triple-digit sales growth for five straight quarters will do that, such as the 171 percent production growth for the second quarter of 2014. So will

The smallest ($4.32 billion market cap) company on this list, has also been the most explosive. Operating exclusively in the Permian Basin, the company’s holdings have grown to over 65,000 acres in less than seven years. For such a young, small company Diamondback is unusually strong, with a cash margin that leads its peers by 40 percent and an expected jump in production of 112 percent over 2013.

Analysts have a consensus one-year price target of $108.89, a 40.7 percent increase from the current $77.39.

PS: Oil and natural gas are making millionaires out of ordinary Americans across the country. Here’s how to take advantage of the “second coming” of energy wealth in America.

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  1. pat mcinnis
    September 14th, 2014 at 11:27 | #1

    Dear sirs, I was listening to a commentary by Kent Moors about filtering water in India but I must have clicked on wrong site can you please advise what website I need to go to for that information?
    thanks, for your assistance…pat mcinnis

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