The Permian Basin in western Texas and southeast New Mexico continues to be the gift that keeps on giving for the oil industry. While this legacy oil field has been pumping out crude since 1921 -- coughing up nearly 29 billion barrels over the past several decades -- shale drilling has recently breathed new life into the play, enabling drillers to unleash some real gushers. In fact, leading shale driller EOG Resources (EOG +1.78%) recently completed one of the best wells ever in the Delaware Basin sub-play. That well has analysts from SunTrust Robinson Humphries projecting good things for its peers in the region, including Concho Resources (CXO +0.00%), Energen (EGN +0.00%), Matador Resources (MTDR +2.23%), and WPX Energy (WPX +0.00%). Because all four control acreage positions in the region, each could also deliver robust drilling results in the future according to SunTrust.
Location, location, location
The well that has SunTrust so excited is in Loving County, Texas, which is near the border with New Mexico. It's in an area where EOG Resources has had notable successes in the past. In fact, in its fourth-quarter report, the company pointed out that it drilled several significant wells across three zones in neighboring Lea County, New Mexico, which helped it deliver expectation-beating production. EOG specifically noted that these wells were several miles north of existing wells, which helped further confirm the company's extensive resource potential in the area.
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SunTrust believes that EOG's robust well results suggest that rival producers in the area could deliver similarly strong well results. That would mean big things for Energen, which estimates that it has 324 future drilling locations in Loving County, along with another 40 in Lea. Meanwhile, it could make WPX Energy's decision to spent $775 million on acreage in the region earlier this year -- including land in Loving County -- all that more compelling. Likewise, the results imply that Matador Resources, which also has a decent size acreage position in Loving County, could be sitting on more value than initially expected. It's also worth noting that while Concho Resources doesn't currently control land in Loving County, it does hold an extensive acreage position in the northern Delaware Basin, including in Lea County, which clearly holds prime drilling locations.
Expectations and upside potential
All four drillers expect to use their positions in the northern Delaware Basin as a springboard for production growth. Concho Resources, for example, expects companywide production to rise 20% to 24% this year -- including 25% oil growth -- and by a 20% compound annual rate through 2019 while living within cash flow at current oil prices. Meanwhile, Matador Resources sees its oil production increasing 38% this year, led by an expected 55% surge in oil output from the Delaware Basin. We see similarly robust growth rates from Energen and WPX Energy, which expect to deliver companywide production increases of 20% and 25%, respectively, this year.
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That said, since recently drilled wells in the Delaware Basin are coming in well ahead of expectations, it suggests that there's upside to those growth projections. That's clear from the results these companies have experienced on their own land by making some slight improvements to their process. For example, Energen recently completed a well in the Delaware Basin using its new Generation 3 frac design. That well delivered a 15% production uplift versus a typical well, which bodes well for future wells using that design. Likewise, Matador Resources noticed a significant production improvement in its latest Loving County wells as a result of improved well targeting and a new completion design.
This data, when combined with EOG's results, suggests that as oil producers in the region hone their craft and implement best practices, future well results could continue to outpace expectations. That could enable these drillers to grow faster than guidance, which would improve profitability and returns.
Investor takeaway
Despite nearly a century of production, the Permian Basin remains loaded with oil, especially in the northern Delaware. That's evident by recently drilled gushers like EOG's well in Loving County. That well has analysts excited because it suggests that other drillers in the region could unleash some monster wells of their own, which could drive production past expectations, providing a catalyst for their stock prices.
