Permian asset values ‘distorted’: BTU Analytics’ Miller

HOUSTON — There’s no doubt, THE place for crude oil producers in North America to be working today is the Permian Basin in West Texas/southeast New Mexico.

The basin, and particularly its Delaware and Midland (sub) basins, have been hot for months, but particularly since the first of this year, with mergers, acquisitions and asset deals dominating industry news.

Interest generally equals higher prices when assets change hands, Kallanish Energy finds. But Kathryn Downey Miller believes the Permian’s popularity is causing purchase prices to go past the norm.

“Market fervor is distorting value in the Permian,” according to Miller, a BTU Analytics managing director, addressing an audience last week at her company’s “What Lies Ahead” one-day conference in Houston. Kallanish Energy was in attendance.

Miller said while most people believe crude oil production forecasting should work solely on economic dispatch, with the play with the least expensive wellhead breakeven price seeing the most activity, such is not the case in the real world.

In fact, there are more than a handful of factors impacting which producers operate in which plays.

 “It’s not that breakevens (prices) don’t matter — they do drive investment and price levels over the medium to long-term,” Miller said. But there are other factors impacting investment.

Such as what Miller called the “portfolio effect,” or where a producer’s assets are located, and what the wellhead breakeven prices are in each play.

Another factor is how much of a producer’s portfolio is hedged. “Companies that are hedged are companies that are growing,” according to Miller. “But only roughly 15% of production in the U.S. is hedged.”

In BTU Analytics research portfolio, Antero Resources’ natural gas assets are 100% hedged, while Eclipse Resources’ crude oil portfolio is roughly 69%.

Access to capital also impacts where producers are operating, according to Miller. “Access to capital is uneven – that impacts where production is,” she said.

Right now, the Permian is obviously where the capital is being placed – more than $20 billion since January 2015 – according to BTU, following the Marcellus/Utica, where roughly $9 billion has been placed in the same timeframe.

Other factors impacting where producers are working include whether or not sufficient infrastructure is in place, mergers and acquisitions have to be justified for all parties involved, and long-term commitments can limit a producer’s flexibility to shift its operations from play to play.

“The current Permian excitement is more about stacked pay upside rather than profoundly better well economics,” Miller said. “Whether or not today’s Permian deals make sense will depend on the true upside potential and development timing.”