When the sun breaks through the industry’s lately stormy skies, it invariably shines on the Permian Basin. At Hart Energy’s recent DUG Permian Conference & Exhibition, in Fort Worth, E&Ps, financiers, midstream players and investors defied the pessimism of the past two years and celebrated drilling and completion gains and production wins. The Permian is where pure-players’ stock values have best held up, A&D still flourishes and a respectable number of rigs drills on.

The operators’ chipper spirits rest on these positives:

The basin is where the money is. Total capital raised for Permian work from 2013 to 2016 (year to date) is $19 billion, with more than 100 private equity-backed companies jostling for position. Increasingly, eyes are on the Delaware Basin, now that the Midland is considered locked up. Even through the downturn, Midland metrics held steady at $25,000 to $35,000 per acre.

The Delaware move is well underway. Massive private equity positions have been built in its southern reaches, with some players betting on an advantaged position to supply some 3- to 8 billion cubic feet per day (Bcf/d) of new natural gas demand in Mexico.

As the equity window opens, Wall Street is hungry for new paper—particularly Permian—and a massive wave of IPOs could occur in the Delaware in the next couple of years, said Mike Wichterich, president and CEO of Three Rivers Operating LLC, during his presentation. Seaport Global Securities Ltd. managing director and senior analyst Mike Kelly noted that Permian E&Ps equities are up 26% year to date vs. 14% for the entire XOP index.

In a $50 to $60/bbl world, drilling and completion activity in the Permian is set to materially increase, taking market share from other oily basins. The Permian has breakevens as low as about $30/bbl for top quartile wells, and Delaware and Midland Basin breakeven economics are 10% to 15% lower than most active basins in the U.S.

Zoom, zoom, zoom

If you compare car racing to Pioneer Natural Resources Co.’s work in the Permian Basin, Pioneer has the pole position and is pulling ahead.

That was the analogy made by Joey Hall, executive vice president of Permian operations. A combination of prime acreage and top execution fuels the company’s strategy. Its scheduled 2016 Permian capex is $1.8 billion, some 90% of its total budget, although Hall acknowledged the downturn has muffled spending.

“We are driving under the caution rules right now. The yellow flag is out, but things will change,” he said, adding that price volatility may prevent a sustained or steady recovery. The company is running 12 rigs and may add more this year if oil stays at or above $50.

Pioneer has assembled a dominant position in the basin through the years. “We definitely sit on the right Tier 1 acreage in the Midland Basin’s sweet spot. We’ve been very successful swapping out acreage with our neighbors to get enough contiguous acreage that we can drill,” Hall said. He termed the acreage trades “incredibly important,” because they allow 10,000-foot laterals.

Development benefits from an integrated approach: Pioneer owns eight frack crews, well servicing rigs and a sand mine to supply proppant.

The company has predicted 12% production growth for 2016. Its first-quarter output was 222,000 barrels of oil equivalent per day (boe/d), with the majority, or 200,000 bbl/d, coming from its Wolfcamp and Spraberry plays in the Permian.

Returns are driven by reduced costs, recovering oil prices, better EURs per well and lower lease operating expense (LOE), he said. Well and frack-stage spacing are crucial phases.

WPX Energy Inc. is just “scratching the surface” of the multistacked oil pay zones such as the Wolfcamp X and Y in the Permian, said CEO Richard Muncrief.

“We don’t stack wells, we stagger them,” he said. “We’re trying to space these wells and fracks perfectly, but sometimes we get the stages too close, too far, too big, too small, too late or too bad. We think we’ve demonstrated that the completion scheme and well spacing go hand in hand to change positive results.”

Hall said Pioneer spends 35.8 cents to get a dollar of value out of the reservoir. The formula shifts as spacing and well costs evolve.

The company is financially stable, he said. Its oil volumes are hedged 85% this year and 50% in 2017, and it is fully funded for its plan, with no need to go to Wall Street for additional capital. Out of 25-plus peer E&Ps, Pioneer boasts the lowest ratio of net debt to net EBITDA for 2016.

Pioneer is ready for the EPA’s new emissions rules for wells and production facilities and participated in the rule-making process. “We’ve been preparing for this from the beginning,” he said.

Wolfcamp preferred

Of the multiple stacked formations in the Permian, the geopressured Wolfcamp is the place to be, according to Tom Layman, vice president of geoscience at Parsley Energy Inc.

The pure-play Permian company has more than 120,000 net acres, two-thirds of which are in the Midland Basin, and plans to drill between 65 and 75 wells this year. Parsley concentrates on the Wolfcamp A and B formations, which are known for superior reservoir quality and an impressive amount of total organic carbon.

“Those are the rocks we’re pursuing first” before tackling Wolfcamp C tests later in 2016, Layman said.

Parsley’s preferred Wolfcamp A and B targets are in Upton and Reagan counties, where geopressures are 0.5 psi to 0.65 psi per foot. This “allows you to cram more molecules of hydrocarbon into core space … and also helps you from an energy standpoint to produce your wells,” Layman noted.

Drilling depths in the area range from 6,000 feet in the south to 10,000 feet in the north. Parsley’s work suggests the Wolfcamp’s sweet spot is in its center, with Layman likening the surrounding areas to a “Goldilocks map.” The north and west are “too cool to cook the kerogen,” and the east and south are “too gassy.”

The company’s acreage is “squarely in the core of the Midland Basin Wolfcamp play,” Layman said, and “the statistically robust set of wells … is meeting or beating that 1 million barrel type curve.”

Parsley plans to test spacing in 2017 with a multiwell pilot program involving stacked development in the Wolfcamp A, Upper and Lower B with 24 wells at 660-foot spacing.

Delaware coming on strong

The Delaware Basin holds world-class rock, and the company is just “scratching the surface” of multistacked oil pay zones such as the Wolfcamp X and Y, said WPX Energy Inc. CEO Richard Muncrief.

More than two-thirds of WPX Energy’s 94,000 acres are believed to be in the “core of the core.” The company entered the Permian Basin in 2015 with its $2.3 billion-plus acquisition of RKI Exploration & Production LLC and remains bullish on the sub-basin. Its current focus is on the Upper and Lower Wolfcamp A—both of which have proven productive.

“As we look across our acreage we see there is prospective across our entire core 60,000 acres in the [New Mexico-Texas] state-line area,” Muncrief said.“The thing that has been a real eye-opener for me is how much oil is in place.”

WPX estimates that there are about 60 million barrels (MMbbl) of oil in place in the Wolfcamp A per 640-foot section.

Delaware action was the talk of the conference as analysts and executives praised the sub-basin’s multizone stacked pay potential—from Brushy Canyon and Avalon to Bone Spring and Wolfcamp to Strawn, Atoka, Barnett, Mississippi Lime and Woodford. IRRs are rising, and operators are improving drilling and completion techniques as they learn more about the basin’s geology.

“When analysts say how good the Delaware is, I can tell you it’s good,” said Muncrief. “Our challenge will be to continue to evolve and continue to get better.”

Since taking over RKI’s Delaware assets in the Wolfcamp A, WPX has reduced well costs by 43%, finding and development costs have dropped by 69% and EURs have risen by 85%, Muncrief said.

WPX is drilling one-mile laterals and aims to work up to 7,500- to 10,0000- foot laterals, which are common where the company operates in the Bakken. It’s using about 1,500 pounds of proppant per foot and is testing upward of 2,000 pounds per foot.

So far, the wells—using slickwater fracks—are trending near WPX’s vision well: a 1 MMboe EUR and $5 drilling and completion cost.

“For a one-mile lateral at $50 oil, you’re seeing returns in the 60% to 65% range,” Muncrief said, referring to year-end estimates.

“As we start drilling longer laterals, I’m quite confident the Delaware is going to shake out on top. It’s great to have a No. 2 and No. 3 player like the Bakken and San Juan [basins,” the company’s other two operating areas.

Rich opportunity

Matador Resources Co. is also plying the Delaware. The Dallas-based company has assets in the Haynesville/Cotton Valley and Eagle Ford plays, but about 97% of its estimated $325 million capex for 2016 is directed to the Delaware.

President Matt Hairford said the company has tested about 15 targets from the top of the Brushy Canyon to the Woodford.

“It’s just a very rich opportunity set,” he said.

This year, Matador plans to drill and bring on production 18 wells in Loving County, targeting the Lower Wolfcamp A, Wolfcamp X/Y and Second Bone Spring; 17 wells in the Rustler Breaks area, including eight Wolfcamp A-X/Y and nine Wolfcamp B wells; and five wells in the Ranger/Arrowhead area, including two Second Bone Spring and three Third Bone Spring wells.

Farther north, in Twin Lakes, Matador plans to drill two wells—a vertical test through the Wolfcamp D to collect about 400 feet of core, which will help determine where to drill a horizontal well, and a Strawn vertical well. Hairford said the Twin Lakes area is “more exploratory in nature” but the company is encouraged by what it has seen so far.

He cautioned that the focus should not only be on drilling multiple zones to yield good rates of return. Preserving value is also crucial. He used a Wolfcamp B well at Rustler Breaks with up to 15 potential locations to illustrate his point. Starting at Brushy Canyon, assuming 180-acre spacing, the company moves through Avalon, First through Third Bone Spring and into Wolfcamp A-X/Y and Wolfcamp B.

“By drilling that single well, you’re adding reserves, and you’re adding PDP [proved developed producing] reserves for that well,” Hairford said. “That’s a great way to preserve value.”

Drilling costs could be reduced with multiwell batch drilling, he added. For example, by drilling five wells to the east and five wells to the west off a single pad, Matador’s drilling team estimates the company could save $400,000 per well, or $4 million on a single pad.

Trimming drilling time pares costs further. In the Wolfcamp, Matador lowered its spud-to-rig-release time from 43 days to 18.
“Those efficiencies are important at any time. … Every 10 days saved is half a million dollars,” Hairford said.

‘Like Christmas’

Dallas-based Silver Hill Energy Partners LLC and Silver Hill Energy II LLC, collectively known as Silver Hill, control more than 42,000 contiguous net acres on the eastern side of the Delaware Basin, mostly in Loving County, said Kyle Miller, president and CEO.

“As a result, we’ve got significant pressure, particularly in the Wolfcamp, and equally important, we’ve got a tremendous amount of hydrocarbon in place,” he said, noting the Wolfcamp A alone has an estimated 120 MMbbl.

“On the eastern side of the basin, our Wolfcamp wells are about 80% oil and about 92% oil plus NGLs—a huge benefit to our economics.”

As a private equity-backed E&P, Silver Hill is working to build attractive assets in hopes of luring future buyers. “Those assets have three key characteristics: They’re low-risk, repeatable and scalable. In our experience, the Delaware has been the perfect place to deploy that strategy,” Miller said.

The company’s multistacked play prospect is oily and has significant vertical and horizontal well control that helps create a “great subsurface story,” according to Miller. Although the sub-basin is still considered underdeveloped, technology—specifically longer laterals and bigger fracks—could propel growth.

Currently running two rigs, Silver Hill is focused on the Upper and Lower Wolfcamp A, Miller said. But it has drilled or participated in a horizontal lateral in each of the sub-basin’s eight key horizontal targets. Based on the results of companies drilling in the area, Miller said, at the current strip, “every one of these intervals generates positive returns and, more importantly, the two Wolfcamp A intervals—the X/Y sands and the Lower A—and the Second Bone Spring generate returns that we feel compete in any price environment.”

The horizontal drilling landscape has changed in the region since 2008. An uptick was evident in 2013 when operators began drilling horizontal wells in Loving and nearby counties. Currently the rig count in Loving is about 20, similar to the days of $100 oil, Miller said.

There’s no shortage of data.

“We joke in our office that every day feels a little bit like Christmas, because we have so much well data coming at us so fast, so many operators trying so many different things,” he said. “It’s definitely made our risk capital exposure decision that much easier, but it’s also created an extremely high learning curve.”

Silver Hill’s neighbors include Anadarko Petroleum, Apache, Concho Resources, Devon Energy, EOG Resources, Matador Resources, Mewbourne Oil, Shell and XTO Energy. Most are targeting resources in the Wolfcamp A and Bone Spring.

Development trends include longer laterals, bigger completions using 1,500 to 2,000 pounds per foot and expectations for 100 to 140 new wells in the next six months, Miller said.

Based on publicly reported IPs, “for each of the Brushy Canyon, Avalon Shale, First Bone Spring, Second Bone Spring, Third Bone Spring and multiple intervals in the Wolfcamp, you’ve got multiple wells that have better than 1,000 bbl/d IPs in the area,” Miller said. “It’s all working to some degree out here. The vast majority of the Wolfcamp A wells in the area have laterals that are shorter than 5,000 feet, and the wells are still outstanding.”

IP rates are not the whole story, he added. Silver Hill has gravitated toward a 22/64-inch choke so as not to negatively impact EURs.

Bigger fracks

Slickwater fracks plus increased sand concentrations produce the best results from Upper and Lower Wolfcamp A wells, Miller said. A 370% increase in sand concentration has led to a 200% increase in average EUR. Higher sand concentrations, using all 100-mesh white sand and nanosurfactants, could further boost results.

“A third of the wells in our area have generated EURs of more than a million barrels,” Miller said, before referring to a set of wells that used more than 1,000 pounds per foot of sand. “Simply put, size matters from a completion standpoint. These wells, using a base of assumptions, generate a 20% rate of return at somewhere close to $30 per barrel.”

Although “cautious in the downturn, we’re preparing to ramp up as market conditions allow,” Miller said. “We think there are more great things to come.”