Eureka! How the Permian Basin Has Energized Dallas-Fort Worth’s Energy Industry
Tuesday, November 13, 2018
The Austin Chalk. The Barnett Shale. The Eagle Ford. These mighty Texas formations are forever cemented into local lore for the fortunes they’ve created. They’re geological playgrounds, where high-stakes games of hide-and-seek regularly occur between eager risk-takers and a precious commodity silently waiting to seep up from below.
But no oil play possesses the unbridled potential of the Permian. Since it was first tapped in 1923, the shale basin has seen extraction of about 30 billion barrels. That pales in comparison to what still lies beneath. According to London-based consulting and research firm IHS Markit, between 60 billion and 70 billion barrels of recoverable oil remain underground. The value, based on current oil prices, tops $4.3 trillion.
“How can we have been drilling in the Permian Basin for 100 years and then find out it has twice as much as we thought?” energy maverick T. Boone Pickens often asks.
It’s a question that remains to be answered, but one thing is for certain: The effects of the Permian are being felt far beyond West Texas, where new technologies and drilling efficiencies have made it easier and cheaper to tap into the basin’s rich reserves. The boom is already having a profound impact in Dallas-Fort Worth, as energy players, logistics companies, private equity firms, investment bankers, M&A and tax attorneys, tech and service companies, oil-and-gas consultants, and others position themselves to get a piece of the action.
Additionally, investors stateside and throughout the world are lining up to focus on companies involved in the Permian, which, at about 250 miles wide and 300 miles long, extends from Lubbock down almost to the Rio Grande and westward into neighboring New Mexico.
In 2017, Irving-based ExxonMobil paid $5.6 billion to double its investments in the Permian. And earlier this year, Dallas-based Matador Resources Co. raised the stakes by spending $387 million on 8,400 net acres in the Permian’s Delaware sub-basin.
The resurgence of interest has caused land prices to soar to as much as $95,000 an acre. The expense is offset by lower production costs in the Permian, with some producers hitting a breakeven of $22 per barrel, according to the upstream website OilVoice.
“Drill, baby, drill,” says Bobby Adkins, president of Arlington-based Adobe Oil and Gas. “Now is the time to make a fortune in drilling. We can drill low-risk prospects, paying back investments in 24 to 36 months—all while earning nice tax deductions, with intangible costs being written off in the current tax year.”
Early Day Innovators
Before divining where DFW’s energy scene is headed, it’s helpful to remember where it has been, starting with oilmen like H.L. Hunt, Algur Meadows, Clint Murchison Sr., and Grady H. Vaughn Sr. Skillful and lucky wildcatters struck it rich and survived the boom times and recessions, brokering deals and celebrating wins at Dallas’ famed Petroleum Club, which was founded in 1934. When a global energy crisis hit in the 1970s, the entire industry came to a screeching halt. A decade more of surplus production and reduced demand for fossil fuels ensued through much of the 1980s. Stung by the losses, Dallas ultimately saw its economy diversify into technology, finance, manufacturing, healthcare, and other sectors, emerging a more stable and much stronger market.
The wild swings of energy did nothing to discourage an enterprising George P. Mitchell, a Texas oilman who would ultimately transform the industry. He drilled his first well in 1952 in Wise County, a North Texas area that was then known as the “wildcatter’s graveyard.” Mitchell soon had 13 wells producing—the first of more than 10,000 drilled in his career.
His most famous play was the Fort Worth Basin, 70 miles northwest of Dallas, where he held leases for more than 300,000 acres. Geologists suspected the land contained some of the country’s largest onshore natural gas reserves. But lying a mile-and-half below the surface was a formation called the Barnett Shale, and no one had yet figured out how to extract gas from such impermeable rock.
In the 1990s, a couple of engineers on Mitchell’s team experimented with improvements to hydraulic fracturing, more commonly known as fracking. First developed in the 1940s, it’s a process whereby liquid is injected into subterranean rocks, forcing existing fissures to open. Instead of using expensive gels and biocides, Mitchell’s crew suggested using a cheap lubricant—polyacrylamide—to create “slick water.” With the addition of sand to kill clogs, the revolutionary mixture instantly slashed the cost of shale drilling by two-thirds. Mitchell combined the new formula with horizontal drilling techniques more commonly used offshore. Other production companies quickly followed suit. And, just like that, the American shale boom was on.
A Global Powerhouse
Dallas is intricately tied to oil and gas—and not just because of Southfork Ranch and the fictional schemes J.R. Ewing made famous on TV. The state of Texas, in and of itself, is the third-largest oil producer in the world, behind Saudi Arabia and Russia. At the end of 2017, there were 180,860 oil wells and 92,289 gas wells permitted in the state. Almost one-third of America’s current oil production comes out of the Permian Basin.
Because the energy industry is so deep and wide, it’s difficult to get a sense of the true impact it has on the local economy. Go looking for a comprehensive study, and you’ll find such a thing doesn’t exist. There are some clues, however, in the form of employment, logistics, and private equity data.
The Federal Reserve Bank of Dallas tracks employment statewide and finds oil and gas extraction accounts for roughly 76,000 jobs. The mining service industry, which includes oil and gas, accounts for another 159,700 jobs statewide, per the Fed’s September 2018 report. Data at the metro level is more limited. In North Texas, the Bureau of Labor Statistics shows about 4,500 extraction and mining services jobs directly related to oil and gas. Due to the limitations of the BLS’ classification system, several peripheral industries, like finance and logistics, which are tied to but not directly involved in extraction, aren’t included.
Logistics for moving much of the nation’s petroleum and gas across the country is strongly linked to DFW. Dallas-based Fortune 500 company Energy Transfer Partners owns wholly or in part approximately 71,000 miles of pipeline in North America, per Securities and Exchange Commission filings. EnLink Midstream LLC, also based in Dallas, accounts for an additional 11,000 miles of pipelines in North America.
North Texas has strong upstream (exploration and production), midstream (transport, storage, and marketing), and downstream (refinery) connections. But where the region really shines is in innovation and energy finance. More than 130 oil-and-gas private equity and financing firms have operations in Crescent Court and other swanky offices throughout North Texas. An additional 62 private equity-backed exploration and production companies call the region home.
Some of the industry’s biggest deals are brokered here. In 2009, local giant ExxonMobil acquired XTO Energy for $41 billion. And earlier this year, Midland’s Concho Resources completed its $9.5 billion acquisition of local player RSP Permian Inc., creating the largest unconventional shale producer in the basin.
Companies active in North Texas production are largely focusing on the Barnett Shale. Known as the “granddaddy” of U.S. shale plays, close to 200 rigs were active during its heyday 10 years ago. The Barnett saw a mass exodus after gas prices took a downward spiral in 2015. At one point, there were zero rigs in the Barnett. But as of the third-quarter of 2018, there were 62 drilling permits for the area, with Devon Energy Corp., Stasney Well Services LLC, and Enervest Ltd. among the largest permitholders. Active operators include Cactus Drilling Co. LLC and Trinidad Drilling LP, with 37 well spuds.
North Texas boasts headquarters or significant regional operations for 21 of the country’s 132 publicly traded oil and gas companies. Significant players like XTO Energy, HollyFrontier, and Chief Oil & Gas make their homes here. Despite their size, these companies and others have been on the leading edge of innovation.
Fort Worth’s Pioneer Natural Resources is one of dozens of local players that have developed well enhancements to improve fracking efficiency in the Permian.
“We’re out-performing what we used to call our 3.0 design,” CEO Tim Dove told Bloomberg earlier this year. “In the new design, our wells, generally speaking, are between 750 and 800 feet. That allows us to drill six wells in each zone, and, of course, we’re drilling multiple sections. .… They do cost more, because you’re using more water and more sand. But we find that the payout has been greater, too.”
Smaller niche companies like iTankData, SandX, and ProFrac, to name a few, are also leading in oilfield services disruption.
“What you see in hydraulic fracturing is that the craft continues to improve,” says Bryce Erickson, senior vice president with Mercer Capital. “Whether it’s the ‘zipper’ or the ‘Texas two-step,’ what you see are different frack combinations to increase efficiency.”
Technology is being leveraged to create other cost-cutting strategies, too. Coppell-based Geoforce, for example, combines a cloud-based software platform with rugged GPS tracking devices and global satellite and cellular networks to help oil and gas companies monitor and maintain their equipment out in the field. A new Hunt Consolidated spinoff, ES Xplore, has come up with a high-tech method for discerning where underground hydrocarbons are located, down to depths of 14,000 feet. (See story on page 37.)
Innovations are also happening in the finance realm. After gaining T. Boone Pickens’ trust in managing his midstream energy holdings, Toby Loftin got the go-ahead to create an energy exchange-traded fund earlier this year. (page 30.)
Largest M&A deals of 2017 involving a Dallas-Fort Worth-based energy company
The Road Ahead
The promise of the Permian looms large for the North Texas oil and gas industry, and there are a number of reasons why.
Along with helping provide energy independence for America, suppliers in the basin are overjoyed about rapid expansions into foreign markets—particularly, our neighbor on the other side of the southern border. After lifting the ban on foreign fossil fuels just three years ago, Mexico now gets nearly 60 percent of its total supply of natural gas from the Permian.
“We’ve been No. 1 in natural gas production globally for the last four years,” says Bernard Weinstein, economist and associate director for the Maguire Energy Institute at Southern Methodist University. “Because we are becoming a global player, what happens to the rest of the world affects us a lot. And that’s especially true with natural gas. It is becoming a globally traded commodity, and we are getting into that business big time.”
Tariffs and an escalating trade war with China could complicate things.
“China is the No. 2 buyer of our oil exports and the No. 1 buyer of our liquified natural gas exports,” Weinstein says. “And if trade disputes escalate and China slaps tariffs or puts quotas on the import of oil and natural gas in the U.S., that’s going to be rough for the industry.”
On the positive side, for Texas at least, state government regulations around fracking bans—like in New York’s Utica Shale and Maryland’s Marcellus Shale plays—are driving exploration and production firms to business-friendly, deregulated states in droves.
“Fracking has become the new F-word in America, for reasons that are a little bizarre to me,” says Amarillo-based economist Karr Ingham. “For a long time, what we professed to want as a country was more energy production and less reliance on imports—crude oil, in particular—from the Middle East and elsewhere in the world. I think the knee-jerk reaction to fracking is that it is bad, horrible, and it’s going to kill us all. When in fact, fracking is principally responsible for raising the standard of living for Texans. The reality is hydraulic fracturing isn’t going anywhere—unless it is legislated out of existence—and I certainly don’t see the state of Texas doing that anytime soon.”
As Permian production surges full steam ahead, transportation and processing capabilities are being tested. The basin currently has a pipeline capacity of about 3.1 million barrels per day, but it’s producing 3.3 million barrels per day, according to the latest U.S. Energy Information Administration data. As a result, transport companies are being asked to take on more than they can handle. It’s leading to increased traffic and putting more wear and tear on roads, due to additional tankers, trucks, and other distributors.
Because of the inability to efficiently transport oil out of the Permian, the resulting excess of oil must be sold at lower costs than elsewhere in the country. At press time, the price of a barrel of oil on the Western Texas Intermediate (WTI) at Cushing, Okla., which is the benchmark for oil pricing in the United States, clocked in at $73.23. Meanwhile, the WTI in Midland stood at $58.10—meaning there is about a $15 discount per barrel for oil in the Permian. Put another way, this is costing Permian production companies collectively about $46 million each and every day. Trends show that the gap will only continue to increase.
“First and foremost, our legislative priority in Austin has to address pipeline constraints,” says Chris Hosek, principal of the Texas Star Alliance. “Any regulation that would hamper our state’s ability to do so is bad for the industry and shortsighted. We’ve got an immediate need—and that is companies absolutely must be able to get product to market.”
On the refinement front, the U.S. is currently operating at about 98 percent capacity in turning crude oil into usable fuel for consumers. With the EIA projecting U.S. oil production to increase by an additional million barrels per day by 2022, the not-too-distant need for more refineries to be built and brought into production is more crucial than ever to ensure that Permian oil reaches consumers.
And therein lies the big opportunity for investors.
“We’re producing as much oil as we can right now,” says Chase Paxton, director of valuations at NGP Capital. “The industry overall, as we’re building out infrastructure, takes a lot of capital. Additional money for infrastructure investments will ensure that the Permian continues to flourish. … Luckily for us in North Texas, we’ve got a little of that,” he says with a smile.