Will private operators keep pushing Permian production higher?
Drilling activity by private operators made waves in 2021 – but can the trend last?
1 minute read
Private operators’ booming activity levels took Permian oil production to new highs in 2021. However, as we enter 2022, headwinds such as depleted drilled but uncompleted (DUC) well inventories and rising service costs threaten to moderate the Permian recovery. So, can private operators sustain this momentum and continue to grow at an outlier pace?
We explored this topic in depth in a recent report. Fill in the form for a complimentary copy, and read on for an introduction.
Private operators can influence the trajectory of future Permian supply
Public independent operators’ drilling budgets remain stubbornly inelastic to rising oil prices, as all focus has shifted to improving financial health, generating free cash flow and returning cash to investors. This change created a unique window of opportunity for private companies to grow production in 2021, benefiting from high oil prices, low service costs and limited competition from their public counterparts. As a result, private operators have grown in scale and now control enough production to influence the trajectory of future Permian supply.
This group – which we refer to as ‘Private Drillers, Inc.’ – controls only 15% of Permian oil production, but has been the main growth driver since the 2020 crash.
For this analysis, conducted using Wood Mackenzie Lens, we selected the top 30 Permian private operators based on their number of recent drilling permit applications. This group – which we refer to as ‘Private Drillers, Inc.’ – includes a mix of family-owned companies and firms funded by private equity or another type of backer. It also includes storied incumbents and newly-founded teams. While the group controls only 15% of Permian oil production, it has been the main growth driver since the 2020 crash. Private Drillers, Inc.’s gross operated oil and gas production has quadrupled over the past five years, and currently sits at 0.6 million b/d and 2 bcf/d (wet gas).
While Mewbourne and Endeavor have standout name recognition amongst the private operators, the other 28 companies produce much more oil in concert. Our analysis shows that 2021 growth came from a large group of private operators of different sizes. Many of them have been growing production aggressively for several years and didn’t skip a beat in 2020 or 2021. Perhaps more importantly, permitting activity for the group is at an all-time high, foreshadowing continued growth.
Financing, inventory and M&A will be key growth factors for private operators
But what could cause private operators to slow down? Outside of oil prices and service cost inflation, we identified three pillars sustaining private operator growth: financing, inventory and M&A. All three worked in Private Driller’s Inc.’s favor in 2021. As we enter 2022, high oil prices will help private operators continue to access adequate financial support. In addition, positive cash flow from existing production combined with short payback periods on new wells will make self-funding an attractive option for certain private operators.
On the other hand, another wave of Permian M&A could quickly shift large volumes from private to public hands. Recent history shows that consolidation by public E&Ps tends to moderate growth. Also, drilling inventory depth will continue to be tested if private companies keep developing their assets at a fast pace. Some companies will eventually exhaust their tier one drilling locations and will have to rely on M&A or less-productive benches to keep growing. These factors would moderate future growth.
An upside risk to Permian supply?
We modelled a scenario to quantify the supply risk based on continued private operator outperformance. Our base case calls for mid to high single-digit annual oil production growth rates in the Permian over the next two years. But, if Private Drillers Inc. continues to defy expectations and its growth trajectory remains uninterrupted, we think there is an upside risk to supply, to the tune of 125 kb/d in 2022 and 200 kb/d in 2023.
A stronger US return to supply growth would alleviate market concerns about potential shortages. Still, private operators alone will not control enough production to have a sizeable impact on oil prices.
Drill into the detail of private operators’ role in Permian production
The full report includes charts and analysis detailing private operator drilling activity, permitting activity, supply outlook and more.