The Permian Basin that sits underneath western Texas and southeast New Mexico has produced a remarkable 29 billion barrels of oil since its discovery nearly a century ago. However, according to a recent report by IHS Markit, drillers have only just scratched the surface since there could be as much as 60 billion to 70 billion barrels of recoverable oil still saturating those rocks. It's a massive prize IHS Markit pegs as being worth a stunning $3.3 trillion at current oil prices.
While hundreds of oil companies are vying for positions to tap into this bounty, a handful built up top-tier acreage holdings in some of the Permian's best spots. As a result, these companies are forecasting prodigious growth in production and cash flow, which could fuel big-time returns for investors if oil doesn't budge and with even greater potential if prices rise.
The leader in the east
Pioneer Natural Resources (NYSE:PXD) controls the largest acreage position in the Midland Basin side of the Permian. The company currently estimates that it can drill more than 20,000 future wells across its land holdings, which could unlock as much as 11 billion barrels of oil equivalent resources. What's most important to note about that drillable inventory is that the company can earn exceptionally high returns at current oil prices, with its 2017 average expected to be between 40% to 75%. Because of those returns, Pioneer believes that it can increase its oil output by 15% annually over the next several years, with cash flow growing at a 20% compound annual rate. In fact, it believes it can boost production up from the 259,000 barrels of oil equivalent per day (BOE/d) it averaged last quarter up to 1 million BOE/d by 2026. That growth could enable Pioneer to produce tech stock-like returns in the decade ahead.
A pure play on all sides
While Pioneer's focus is in the Midland Basin to the east, Concho Resources (NYSE:CXO) is taking a basinwide approach since it controls acreage in the Midland as well as both the Northern and Southern Delaware Basin and the New Mexico Shelf. That diversification across the Basin gives the company more room to expand. With more than 19,000 drilling locations that hold an estimated 8 billion BOE of resources, it has ample resource potential already under control. Consequently, Concho Resources is on pace to increase its production by a 20% compound annual rate through 2019, which it can achieve within cash flow at around current oil prices.
Parsley Energy (NYSE:PE) is leveraging its Permian position to grow at breakneck speed these days, with output up 18% last quarter and 81% over the past year. Fueling that growth is that Parsley Energy quickly built up a strategic position via a series of acquisitions over the past couple of years on both sides of the basin and now controls more than 8,000 high-return drilling locations. Currently, it can earn a 60% rate of return on wells drilled in the Midland at $50 oil. However, profitability will skyrocket if oil moves higher since the company, for example, can earn a more than 100% rate of return if oil hits $60, which would enable it to make more money and create greater value for investors.
Ready for round two
Centennial Resource Development (NASDAQ:CDEV) CEO Mark Papa came out of retirement because he saw an opportunity to make a mint on the Permian Basin. His team quickly snapped up a sizable acreage position in the Delaware side of the basin thanks to a series of acquisitions and have rapidly expanded oil output, which has risen 215% to 18,000 barrels per day. However, Centennial Resource Development is just getting started, with its current plan to increase output up to 60,000 barrels a day by 2020, which it believes will enable the company to deliver the "best equity performance of any U.S. mid-cap E&P through 2020." Given Papa's past success and Centennial's prime position in the Permian, the company stands a good chance of achieving that ambitious goal.
Cashing in at current prices
Diamondback Energy (NASDAQ:FANG) has also been highly acquisitive in recent years, which has enabled the company to put together a large-scale position in the Permian. Its biggest deal came last fall when it bought rival Brigham Resources for $2.4 billion. That purchase enabled Diamondback Energy to accelerate its drilling program, putting it on pace for more than 60% production growth this year while running eight drilling rigs. One of the reasons it can grow so fast is that its wells deliver a gusher of cash flow in their first year of operations. Its wells in the Midland Basin, for example, pay back 90% of their cost within the first year at $50 oil, which gives the company the money to quickly drill more high-return wells.
Drilling for buried treasure
Oil companies are pouring billions of dollars into the Permian Basin in hopes of unlocking the treasure trove of oil trapped within its tight rock formations. Fueling these investments is the fact that drillers with top-tier positions can generate exceptional returns at current oil prices, with even more upside if crude rebounds. That's why it would behoove growth-focused investors to consider adding a Permian-focused driller to their portfolio because they have the potential to fuel market-smashing returns as long as crude holds up.