October 20, 2016Volume 6, No. 2
 
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Permian Rig Count Continues to Rise

Spurred by Sharply Lowered Drilling Costs


Slide

Improving Well Performance

Concho


September 6, 2016

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Reducing Wolfcamp D&C Costs

Pioneer


September 2, 2016

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After two years of plummeting US rig counts, Permian Basin producers have added 71 rigs since the first week in May 2016, a 51% increase in just five months. Part of the reason is, of course, the recovery in oil prices to the $45-50 per barrel range after the plunge to around $35 per barrel around the turn of the year. But the major impetus appears to be continuing reductions in drilling and completion costs that allow Permian operators to accelerate drilling without substantially raising their 2016 capital budgets.

The 21 largest oil-weighted US E&Ps reduced their 2016 capital budgets by an average of 51% from 2015 spending, a steep decline that was expected to decrease output by 7%. But continued drilling efficiencies in the first half of the year has instead spurred Permian producers to increase drilling activity in the second half without substantial capital spending increases. The impact of this acceleration should certainly be a resumption of volume growth in the Permian in 2017.

Concho Resources’ results are one example. At midyear 2016, the company reported an average reduction on well costs per lateral foot of more than 40% in the five quarters since the first quarter 2015, led by a 48% and 47% reductions in the Midland Basin and New Mexico Shelf, respectively. As a result, Concho is running 17 Permian rigs, the highest number in the basin, including 7 in the Midland, with no increase in its initial 2016 capital budget. It has also raised its 2016 production forecast from 1% to up to 3% output growth in 2016 and back to double digit growth in 2017.

Midland Basin-focused Pioneer Natural Resources is another player and announced last month that it was planning on increasing its rig count from 12 to 17 by year end, one in September, two in October, and two in November. The company’s average well cost has fallen 35% since the end of 2014, despite a substantial increase in Version 2.0 wells (longer laterals, more stages, proppant, and sand) and Version 3.0 wells (more intensive than Version 2.0), which add $0.5 and $1.5 million in costs, respectively. About 60% of wells drilled in 2016 were Version 2.0, plus five pilot Version 3.0 wells. The company expects this drilling increase will generate 13-17% production growth in 2017.


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featured.slides from docFinder

Slide Slide Slide Slide

46% cut in drill costs

Diamondback

August 1, 2016

Increasing drilling 50%

Encana

September 7, 2016

Drill costs down 26%

Parsley Energy

September 6, 2016

Adding a 3rd rig now

RSP Energy

September 6, 2016

The Permian’s high profile player Diamondback Energy reported a 46% reduction in overall drilling costs in the Midland Basin since the end of 2014 to just $633 per lateral foot, the lowest reported by any producer in the play. The company had already been investing more aggressively, keeping its 2016 capital budget level with the preceding year. But increased efficiency allowed it to add a fifth rig in September 2016 and a 30% increase in its 2016 production guidance since the first of the year.

Encana’s 40% reduction in drilling and completion costs this year has led to a dramatic shift in investment towards its Midland Basin assets, which it primarily acquired in 2014 in the $7 billion purchase of Athlon Energy. Encana is allocating 53% of its budget to a play that represents just 14% of production. The company is running four horizontal rigs for development and a vertical rig to hold acreage in the Permian in 2016, but in 2017 will increase activity by 50% with only a 20% increase in capital spending. The company expects to grow production by 300-400% by 2021.

The fastest growing public Permian producer is Parsley Energy, which forecasts a 68% output growth in 2016. The company’s 2016 capex is at 2015 levels, but the 26% reduction in Midland costs and 41% decline in Delaware Basin cost in the last 12 months have resulted in a plan to add a rig to the Midland and Delaware basins, bringing its total to six in the play.

RSP Energy has recorded a 46% decline in total drilling and completion costs and actual well cost per lateral foot since the last quarter of 2014. The company is adding a third rig in the play in the third quarter and the increased productivity has generated an increase in its 2016 production guidance from an initial 9.1 million boe to 10 million boe, a 10% rise. Lower costs have allowed this company to finance growth and maintain a debt to total capital ratio of 24%, among the top 20% in the industry.

 

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