5 Stocks to Play the Permian Basin
The Permian Basin is an oil-rich sedimentary basin that stretches across the western part of Texas and southeastern New Mexico. Right now, the basin is one of the busiest oil plays in the U.S., producing more than one million barrels of oil per day. It accounts for 68% of all the oil produced in Texas, and 80% of the state's reserves. Today, we'll take a look at five companies giving investors an opportunity to cash in on the region.
SandRidge Energy Permian Trust (NYSE: PER)
Production numbers are typically the main concern with royalty trusts, but not this one. The Permian Trust IPO'd in August 2011, and production numbers for the year turned out nicely as wells produced 473 million barrels of oil equivalent. The trust anticipated $34.6 million in distributable income, but the final number was closer to $38.6 million. It's an impressive result, especially given the average actual price received for oil was less than anticipated.
The trust owns an 80% royalty interest in 509 developed wells in the basin, and a 70% interest in 888 wells yet to be drilled. Well on its way to fulfilling its drilling obligation, parent company SandRidge Energy will drill more than 750 wells in the Permian Basin in 2012.
Devon Energy (NYSE: DVN)
While most producers have been targeting the Basin's Wolfcamp formation, Devon recently put together a 500,000-acre swath across the Midland section of the Basin in an effort to exploit the relatively untested Cline formation.
The company is targeting liquids production there, and plans to drill 15 horizontal wells in the Cline this year. Devon estimates the wells will cost about $6.5 million each and produce 570 mboe. The company plans to have four rigs operating in the region by year's end. Devon is currently drilling its first well there.
Linn Energy (Nasdaq: LINE)
According to CEO Mark Ellis, the Permian Basin is the driving force behind much of Linn's organic production growth. The company entered the Permian in 2009 and has been increasing its acreage ever since.
Today, Linn Energy has more than 100,000 net acres and operates 1,300 wells in the play. In 2011, full-year production in the Basin grew 137% over the prior year. Things won't slow down in 2012, as Linn plans to spend $220 million drilling 100 wells over the course of the year. The company estimates it has 88 million barrels of oil equivalent in proved reserves, with a reserve life of 18 years.
Occidental Petroleum (NYSE: OXY)
Occidental is actually the largest operator and oil producer in the Permian Basin. The company produced about 15% of all the oil that came out of the West Texas play last year. Oxy drilled 409 wells in 2011, and estimates it has 2.5 billion barrels of oil equivalent in recoverable reserves.
The Permian Basin remains a key focus in 2012. Occidental has dedicated 20% of its $8.3 billion capital budget to developing its assets in the basin this year. The company plans to increase its rig count from 23 rigs to 27 rigs by year's end.
Atlas Pipeline Partners (NYSE: APL)
Atlas Pipeline controls two midstream plants in the Permian Basin, with a third on the way. Collectively, the system processed an average volume of 196.4 million cubic feet of natural gas per day in 2011, up from 163.5 mmcf per day in 2010. Natural gas liquid volumes were also up 8.9% year-over-year. Atlas expects those numbers to continue to increase as producers ramp up their drilling programs in the coming years.
In anticipation of the added volumes, Atlas Pipeline is building a new 200-mmcf-per-day cryogenic processing plant in the Permian Basin. Construction will take place in two phases, with 100 mmcf/d capacity coming online in the first quarter of next year.
The Permian Basin is yet another energy reserve experiencing new success because of horizontal drilling. Until the price of natural gas picks up again, domestic oil plays like the Permian will dominate the focus of production and companies like the ones outlined above will produce great returns. Read about one more energy stock set to soar in our special free report "The Only Energy Stock You'll Ever Need."