Oil companies have flocked to the Permian Basin in recent years, spending billions of dollars to snap up land on both sides of the oil-producing region. However, companies that focused their attention on the region's western Delaware Basin set themselves up for an even bigger payday than those that staked their claim in the Midland Basin on the eastern side of the Permian. That's evident by a new study from the U.S. Geological Service, which unveiled the news that the Delaware holds an estimated 46.3 billion barrels of oil, which is more than twice as much as the Midland. Further, the Delaware also holds 218 trillion cubic feet of natural gas, a jaw-dropping 18 times more than its sibling basin to the east.
That bounty of oil and gas bodes well for companies like Diamondback Energy (NASDAQ:FANG), WPX Energy (NYSE:WPX), EOG Resources (NYSE:EOG), Apache (NASDAQ:APA), and Marathon Oil (NYSE:MRO), which have allocated most of their acquisition capital on the Delaware side of the Permian.
Taking a big bite out of the Delaware Basin
Diamondback Energy started in the Midland Basin. However, it entered the Delaware in 2016 after it spent $560 million to buy some land in the region. The company would go on to make a transformational acquisition a few months later when it bought the Delaware-focused Brigham Resources for $2.43 billion and added even more land in the Delaware when it bought Energen for $9.2 billion earlier this year. As a result of those deals, Diamondback Energy now holds enough land to drill nearly 3,000 highly profitable wells in that oil-rich basin, which positions it to deliver strong production and cash flow growth for years to come.
Choosing the right side
WPX Energy entered the Permian Basin in 2015, spending $2.35 billion to buy privately held RKI Exploration & Production. That deal brought with it 92,000 acres in the core of the Delaware Basin. WPX Energy went on to make a small bolt-on acquisition in the region during 2016 and then spent another $775 million to buy more land in the Delaware in 2017. As a result of these deals, WPX Energy controls a large-scale position in the region, which should fuel high-octane oil production growth for years to come.
Making an exception
EOG Resources has traditionally stayed away from making acquisitions, preferring to explore for new sources of oil. However, in 2016, the company made an exception, spending $2.5 billion to buy Yates Petroleum. The deal brought with it vast land holdings across the western U.S., including a prime position in the Delaware Basin of the Permian Basin. It was a deal that EOG Resources couldn't pass up, as it was able to buy that land in the Delaware for around $7,500 an acre, whereas Diamondback Energy, for example, spent $29,500 an acre to get its initial foothold on that side that year.
Quietly buying where no one was looking
Apache has operated in both sides of the Permian Basin for years. However, during the oil market downturn, the company secretly leased a large-scale position in the southern part of the Delaware Basin where the industry hadn't found much success. By applying new techniques to the region, Apache uncovered a treasure trove of oil and gas, which it dubbed the Alpine High discovery. Apache believes that its acreage contains more than 3 billion barrels of recoverable oil and another 75 trillion cubic feet of natural gas, which should fuel fast-based production and cash flow growth for the next several years.
Reinvesting in the right region
Early last year, Marathon Oil sold its Canadian oil sands assets for $2.5 billion. The company simultaneously used $1.1 billion of that money to buy 70,000 acres in the Permian, including more than 50,000 acres in the Northern Delaware Basin of New Mexico. Marathon followed that deal up a few weeks later by acquiring another 21,000 acres in the Northern Delaware for $700 million in cash. Those deals have provided Marathon with a resource-rich position in the region, which, when combined with its other shale positions across the U.S., gives it the fuel to grow production at a double-digit annual rate on the cash flows it can produce on $50 oil.
More fuel to grow
Oil companies have been acquiring land across the Permian at breakneck speed in recent years. However, those that spent the bulk of their money on acreage in the Delaware side of the Permian seem to have made a better decision, since it holds significantly more oil and gas than the Midland. Because of that, those oil stocks could generate higher returns for their investors as they pump out higher volumes from that more productive region.