The Permian Basin has been the most affected play in the US since the beginning of the Covid-19 pandemic. The play had a drastic drop in its output going from 4.85 million barrels per day (mmbd) in March 2020 to 3.89 mmbd in May 2020. At its peak in March, the Permian had 405 drilling rigs and currently, in September, there are just 125 drilling rigs in the area. Oil production has grown back to reach 4.11 mmbd in August. The rise in production came mainly from operators re-opening up wells that were previously shut-in during prior months. The expectation is for the bulk of new production to come from the completion of drilled uncompleted wells (DUCs), where the majority of the cost has been already incurred.
During the second quarter of 2020, when the average spot price for West Texas Intermediate (WTI) was $27.81 per barrel of oil (bbl), only a third of the top 15 operators in the Permian Basin were able to receive a higher price than average. These higher selling prices were achieved mainly by having an average of 65% of oil production hedged. For instance, Laredo Petroleum had the highest realised price in Q2 with a price of $44.97 per bbl, but at the same time, the bottom third of the operators were only able to average a price of $18.74 bbl while hedging an average of 30% of oil production.
With the contraction in demand for both crude oil and oil product persisting for a prolonged period due to Covid-19, there has been a lookout for potential acquisitions with the goal of consolidating operations to lower costs. Chevron’s $13bn acquisition of Noble Energy, including debt, is one of the largest transactions in 2020. Although several synergies are created through this transaction, Chevron was also attracted by Noble’s Permian acreage of 92,000 acres that are in close proximity to Chevron’s acreage, especially since its plan to acquire Anadarko fell through last year. Although Chevron recognises Permian as its greatest cash generating portfolio, the company is maintaining discipline in the capital spent in Permian assets as a response to the market condition and is vouching to focus on efficiency.
Another relevant deal in the Permian is the recent $2.6bn all-stock merger, involving Devon Energy and WPX Energy. Both companies have the majority of their portfolio coming from the Permian Basin and have overlapping acreage. The merger is beneficial for both companies as they could combine operational expertise in Permian operations, even though it might result in a reduction in their workforce.
The outlook for the Permian Basin is ultimately tied to the wider outlook for the oil and gas sector during the post-pandemic reality. Indeed due to the reopening of cities and overall increased mobility, there has been positive sentiments about the recovery of economic activity in the past couple months supported by an increase in gasoline supplied to the domestic market. However, the recovery is misleading as it coincided with the summer months when usually demand for transportation fuels is higher. With Covid-19 cases still on the rise in several states of the country, the most likely scenario is one where restricted mobility persists as long as the trend of infections does not revert, limiting the full recovery of oil demand. In addition, there is some uncertainty with respect to results of the US presidential election, where Democratic candidate Joe Biden is generally perceived as implementing changes that will reduce the future growth of the US oil and gas industry.
Although Permian production has rebounded in the recent last few months, the growth in Q4 will be minimal as operators remain cautious and maintain capital discipline in their development plan towards the Permian Basin. As we approach 2021, GlobalData estimates a conservative growth in production in the Permian Basin from an annual average of 4.3 million barrels of oil per day (mmbd) in 2020 to approximately 4.4 mmbd in 2021. This forecast is based on the current WTI futures price curve, which currently shows a gradual increase into 2021 and can certainly be adjusted, following the impact on the oil price that oil demand evolution and inventories changes will continue to have during 2020 and 2021.