The Poster Child of U.S. Oil Production Is OPEC’s Foil

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

Oil & Gas

The oil field services sector has gotten pummeled over the last couple of years.

Since the start of 2015, there have been 127 bankruptcies in the sector. One-hundred twenty-three North American oil and gas producers have gone belly up since then too.

That’s 250 companies with a combined debt of $105.8 billion. It all happened because OPEC wanted to put U.S. shale producers out of the oil business.

It almost worked. But in the end, all it did was anger the U.S.

And you don’t want to anger the U.S.

You see, U.S. workers, U.S. companies and the U.S. as a country may get down, but we’re never out. All OPEC’s stunt did was increase the resolve of the remaining American oil producers and service companies.

Now it’s payback time. And for OPEC, the timing couldn’t be worse.

OPEC’s newest move in the global oil tug of war was to cut production by 1.8 million barrels per day (bpd). Its initial time frame went through the end of June 2017.

But that didn’t work. So it extended cuts through March 2018.

You see, OPEC is desperate to raise prices. Many member countries depend on oil revenues to drive their economies.

But turnabout is fair play. In response to OPEC’s desperate moves, U.S. producers fired up previously mothballed oil rigs.

They equipped them with the latest technology. Now they’re drilling hundreds of new wells in unconventional shale plays and setting production records. And they’re bringing those wells online like there’s no tomorrow.

Rig counts have increased for 22 straight weeks. And U.S. oil production has gone from 8.4 million bpd in October 2016 to more than 9.3 million bpd as of the first week of June.

America’s Most Prolific Oil Play

Most of the U.S.’s daily production is increasingly coming from one spot: the Permian Basin. It’s loaded with more than a dozen oil-soaked layers. Check out the graphic below…

The amazing thing about the Permian is how much oil it holds.

According to research group Rystad Energy, the U.S. now holds more oil reserves than Saudi Arabia does. Further, current estimates suggest that the Midland and Delaware basins – both within the Permian – hold as much oil as the Ghawar Field in Saudi Arabia holds…

And production in the Permian is just starting. Between the Midland and Delaware basins, there are 14 separate oil-bearing layers.

They contain an estimated 150 billion barrels of recoverable oil equivalent. That’s equal to what’s in the Eagle Ford, Niobrara, Bakken and Marcellus… combined.

Of the Midland’s 13 oil-bearing layers, the Spraberry/Wolfcamp is currently the most prolific. Production has increased from 150,000 barrels of oil equivalent per day (boe/d) in 2007 to nearly 1.2 million boe/d today.

Horizontal drilling, especially with longer laterals, has been a real game changer in the Permian.

Over the last 90 years, the Permian has yielded 35 billion boe… and there’s another 150 billion boe known to remain. That number will continue to rise as more delineation drilling proves the existence of even more reserves.

Right now, the Permian is producing about 2.2 million bpd. That’s almost a quarter of the total U.S. production.

About six years ago, only 15% of all the oil rigs drilling in the U.S. were on Permian acreage. Now that number is at 50%.

In the last year alone, Permian oil rig counts have nearly tripled. Eventually, all the wells that these new rigs are drilling will be added to production.

Besides sticking it to OPEC, those rigs are putting money in operators’ pockets… and will eventually reward shareholders too.

Right now is the perfect time to buy beaten-down Permian oil producers. Nobody wants them now with oil prices in retreat.

But you can bet that contrarians are gobbling up shares. You should too.

A year from now, you could be richly rewarded.

Good investing,

Dave