The Overthrow of Saudi Arabia

David Fessler By David Fessler, Energy and Infrastructure Strategist, The Oxford Club

Oil & Gas

As the old saying goes, “Everything is bigger in Texas.” It turns out that goes for oil fields, too.

Texas contains the second-largest oil field in the world.

Investors should absolutely own one or two companies that are drilling in this field. I’ll tell you one of my favorites in a moment.

But first… let’s look at the world’s largest oil field. That is unquestionably Saudi Arabia’s massive Ghawar field.

The Ghawar field measures 19 miles wide and 174 miles long. Discovered in 1948, it is owned and operated by Saudi Arabia’s state-run oil company, Saudi Aramco.

The Saudis have released very little information concerning Ghawar’s performance, reserves and other technical information.

Through 2010, the Ghawar field produced more than 65 billion barrels of crude. Currently, it produces 5 million barrels per day of crude and about 2.5 billion cubic feet per day of natural gas.

Ghawar’s estimated remaining reserves are the subject of debate among oil industry experts. Reliable data is hard to come by, since Saudi Aramco does not disclose its estimates.

However, estimates from the EIA and others indicate 50 billion to 60 billion barrels of recoverable oil remain. That means Ghawar’s total crude content is 115 billion to 125 billion barrels.

Those are some impressive numbers.

But there’s a field within the Permian Basin – located mainly in West Texas – that is nearly as big…

The Spraberry/Wolfcamp formation alone contains 75 billion barrels of recoverable crude.

And it’s not the only crude-oil-bearing formation in the Permian.

For instance, the Delaware formation contains 40 billion barrels of recoverable oil. But the Spraberry/Wolfcamp is where some of the biggest exploration and production companies are operating.

Right now, the Permian contains most of the active drilling rigs in the U.S., and in the world for that matter. Earlier this month, crude drillers added 11 more rigs.

There are now 258 rigs drilling for crude in the Permian, more than half of all active rigs in the U.S. That compares to 206 this time last year.

And since 2015, it’s been the only growing shale formation in the U.S.

I expect the rig count to grow more in the Permian than in any other U.S. shale formation.

And it’s no wonder why… It’s a stacked play with as many as 14 oil-bearing layers.

Each layer contains oil- and/or gas-bearing hydrocarbons. Imagine 14 oil-bearing fields stacked on top of one another and you get some idea of the potential of the Permian Basin and its oil-bearing formation.

That makes the Permian the most economical play for E&P companies holding acreage there. They can hit multiple oil-bearing layers from one drill pad and even from one wellbore.

That lowers the lifting cost of the oil compared to other single-layer horizontal shale plays. And with oil prices in the $50 to $60 range, companies with low lifting costs will rule the oil patch.

The King of the Permian

One E&P company outshines all the rest when it comes to the Permian. I’m talking about Pioneer Natural Resources (NYSE: PXD).

Pioneer has the largest Spraberry/Wolfcamp acreage position. At its current rate of drilling, it has several decades of drill sites in its inventory.

Pioneer has been through five oil downturns. And the key to getting through one is simple: a clean balance sheet. They don’t get much cleaner than Pioneer’s.

Pioneer is poised to grow to more than 1 million barrels per day of production and operate for the next 10 years without incurring any additional debt or equity offerings.

Pioneer expects to grow at a compound annual growth rate of 15% through 2020. With oil in the $55 range, the company’s capital expenditures will be well within its cash flow by 2018.

There aren’t many E&P companies operating today that can say that. How’s Pioneer managing to do this?

It’s spent lots of time engineering its well-drilling and fracking processes. Right now the time it needs to drill a horizontal well is half what it was several years ago (20 days vs. 40 days).

In its fracking process, it’s using twice the sand and water that it used to use. The spacing between fracking stages is now 100 feet, compared to 240 feet in 2014.

Pioneer has determined that closer spacing means more oil can be extracted from the surrounding shale. The spacing is determined by trial and error.

As a result, Pioneer is by far the largest Spraberry/Wolfcamp crude producer, producing 230,000 barrels per day. Its closest competitor is producing a mere 64,000 barrels per day.

During the second half of 2016, Pioneer has worked to increase the number of rigs drilling on its Spraberry/Wolfcamp acreage from 12 to 17. Its 2016 capital expenditure program is $2.1 billion, with $1.9 billion of that directed at its Permian operations.

In 2017, with 17 rigs operating, Pioneer expects to deliver growth in production in a range of 13% to 17%. And remember, that’s at current WTI prices.

With Trump at the energy controls for the next four years, savvy investors will definitely want to have exposure to a top-notch independent U.S. crude producer like Pioneer.

Good investing,

Dave