The Permian is the king of U.S. oil plays and by some measures could be taking the crown as the biggest oil field in the world. However, various economic forces are keeping profits and valuations in check.
have shown similar results. Shale producers are spending more than they are making. How can this be with such a plethora of resources and the means to transport it? The answer lies in two conundrums: expensive fracking and completion costs; and steep production decline curves. Getting to the oil is expensive, and once a producer finds it, the tight well formations drain quickly. The only way to get more production and associated revenues is to drill more.
This wouldn’t be too much of a problem in a $65 or $70 oil environment, but when oil is in the mid $50s, there’s not much profitability cushion and it shows. The April issue ofincludes a table showing median breakeven prices in the Permian. In the Delaware Basin median breakevens range between $42.50 and $45. In the Midland Basin median breakevens range between $44.30 and $53.00. Keep in mind – these are medians. Half of producers can produce it cheaper, but half are more expensive too.
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