1 Place Where Oil Companies Really Need to Improve

A Devon Energy pump jack in the Permian Basin. Photo credit: Devon Energy

Texas' Permian Basin produces more oil each year than the Bakken or the Eagle Ford. However, despite its legacy as a top producer, this Texas oil basin could be doing a lot more. That's because it has yet to fully embrace the technological improvements that have been driving much of America's energy boom.

Room for improvement
Any investor that's following a Bakken producer knows that the focus there has been on cutting costs and getting more oil out of each well. Producers have focused on becoming more efficient drillers. A move to pad drilling has helped reduce drilling time to the point that producers are able to add 500 barrels of oil production per month for every rig that's used. This rate has almost doubled in the past year.

The Permian Basin, on the other hand, has actually become a bit less efficient when comparing that same metric. Its average rig only adds 79 barrels of new oil production each month, which is actually less than the prior year. Clearly, there is room for Permian Basin operators to improve.

As it turns out, an improvement just happens to be in the works. This is most clearly seen in the shift from vertical drilling rigs to horizontal drilling rigs. For example, drillers focused on the Spraberry/Wolfcamp were using vertical rigs to drill 96% of the wells as of early 2011. That number has now improved so that horizontal rigs are now drilling about a third of the wells into those formations. The following chart shows the steady shift toward horizontal drilling.

Source: Pioneer Natural Resources

Making headway
One of the companies leading that shift is Pioneer Natural Resources (NYSE: PXD  ) . The company currently operates a dozen horizontal rigs and 15 vertical rigs. Looking ahead, Pioneer Natural Resources sees its horizontal rig count growing to 50 by 2018. However, its improvements in the future will go beyond simply moving to horizontal drilling rigs. That's because Pioneer is still transitioning to pad drilling and expects to be 70% converted to pad drilling this year. Further, right now it's being slowed down by including extra time for science and appraisal activities, moves that should pay off over the long-run.

It's a similar story at Concho Resources (NYSE: CXO  ) . It too focused on moving its drilling program horizontally. For Concho, 17 of the 22 rigs it operates are drilling horizontally. That enabled Concho Resources to complete a record number of horizontal wells last quarter, which fueled 37% production growth. That being said, like Pioneer, Concho still has room to improve including building greater scale to further reduce costs and improve returns.

Finally, one company that really has focused on making continuous improvements in its Permian Basin operations is Devon Energy (NYSE: DVN  ) . Its drilling days are a great example of this. Led by pad drilling, Devon has slashed its drilling days by 60% since 2012. In addition to that, Devon Energy has been able to get its service and supply costs to fall by 3%. These improvements in the Permian have helped Devon Energy drive 36% growth in its U.S. oil production this year.

Investor takeaway
The Permian Basin isn't growing as fast as it could. While the play has produced steady 7% annual production growth since 2007, it's projected to do better in the future. Current projections call for 12% annual production growth through 2017. Clearly the play has the potential to achieve faster growth.

Aside from just growing production, as producers shift gears and focus on cost containment it will improve returns for investors. That's exactly what we are seeing from Devon Energy and to a lesser extent Pioneer Natural Resources and Concho Resources. However, both are still early in shifting gears, meaning these companies can't be expected to be running at full speed just yet.

Looking for ways to profit from America's energy boom?

Horizontal drilling has helped to drive the record oil and natural gas production that is revolutionizing the United States' energy position. It's also fueling profits for investors. If you are looking for ways to play this boom, the Motley Fool is offering you a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 


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9/27/2016 4:00 PM
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