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Permian Basin Rig Count on the Rebound

A Baker-Hughes report said that the U.S. rig count reached 406 on August 19, which is 90 rigs higher than it had been in late May. The uptick shows how exploration and production (E&P) companies remain confident that they can still be profitable even if oil prices drop beneath $50 per barrel. The Permian Basin is the largest benefactor of this confidence with nearly 60 new rigs during that 3.5-month period. That area is suddenly the default choice for shale companies wanting to drill new wells. The resurgence is sure to cause a dip in oil prices as a recent oil and gas reserves evaluation stated that the U.S. is sitting on more oil than it has for some 85 years.

The resurgence of the Permian Basin is likely to continue because experts believe the area’s wells can realize a profit if oil prices drop as low as $30 per barrel thanks to new cost-cutting technologies and a boost in production. Other previously popular sites like Bakken and Eagle Ford have seen only a handful of new rigs during that same period. Even without taking petroleum economics courses, it is easy to see why companies have flocked to the Permian Basin and specifically to the counties of DeWitt, Midland, Howard, Martin, Ward, Loving and Reeves. The Texas Railroad Commission said that those counties’ combined output was around 430,000 barrels a day back in November. If Texas was a country, it would be the sixth-largest oil producer in the world. Activity in DeWitt County alone increased by 77 percent in the third quarter of 2015.

Successful Permian rigs, such as Wolfcamp, Bone Spring, Wolfbone and Spraberry, have reached a break-even point lower than $30 per barrel. In some cases, profits can still be expected below $25. Currently, the New York Mercantile Exchange has West Texas Intermediate crude listed at $31.72 a barrel. Break-even rates are compiled using methods taught in oil and gas training courses that include all of the costs attendant with oil production, such as average well output and local expenses like school taxes.

This success is not typical throughout the country. Many workers have been laid off as 65 percent of drilling rigs are no longer pumping. As recently as last January, 42 E&P companies filed for bankruptcy protection.

Prices may drop even more when currently completed wells are hydraulically fractured. Existing wells in Reeves County that have not been fracked will continue to earn a profit when they are completed if the cost of oil remains above the astonishingly low price of $14 per barrel.

Being in the right country does not guarantee success. According to Kathryn Downey Miller, who is a principal at the Colorado-based energy research firm BTU Analytics LLC, there is a wide disparity of break-even levels within a small area like a county. For wells drilled in Dewitt County during 2014, for instance, 45 percent would have seen profits with prices below $20. On the other hand, 5 percent would not be profitable until the price reached $70. Miller also said that by maintaining cost reductions and technological improvement, many companies that may be currently suffering will be stronger and more competitive than they were before prices dropped.

Companies have been diverting billions of dollars to the Permian Basin that would have gone to Bakken and Eagle Ford. The Permian is expected to enjoy a 3,000 barrel per day increase this year, which will bring it close to the peak output of last year. Strong investor expectations are evidenced by the fact that nearly 45 percent of asset purchases by banks, E&P companies and private equities have been in the Permian Basin.

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