Stable and steady makes the Bakken attractive to investors

By Patrick C. Miller | July 17, 2018

As someone who makes his living studying the differences between the Bakken and the Permian shale plays, Pablo Prudencio—an upstream analyst in Wood Mackenzie’s Houston office—believes that the phenomenon known as “Permania” is over.

Prudencio, who works on the U.S. Lower 48 upstream research team for the consultancy firm, focuses on activity in the unconventional plays within the Williston and Permian basins. He spoke Tuesday at the fourth annual Bakken Conference & Expo in Watford City, North Dakota.

“Permania was a very popular term early last year,” he explained. “There were a lot of deals in the first quarter of 2017 in the Permian. A lot of companies paid a lot of money to either enter the Permian or to expand their positions. That’s why the industry gave it that term.

“However, since then we’ve seen a slowdown,” Prudencio continued. “We see some deals here and there that still grab the headlines. The average Permian deal was about $25,000 per net acre. We’ve seen some deals that paid way over that. Those will still attract the attention of everyone. But in terms of the amount of deals, we have seen a slowdown since Permania.”

Prudencio assists Wood Mackenzie’s clients who are considering investments in the Bakken or the Permian. He weighs the pros and cons of each play, considering the breakeven analysis to determine the economics and stress-tests the sensitivity of assumptions. He shared his observations of the two unconventional tight oil plays with Bakken Conference attendees.

What many producers find attractive about the Permian is its 2,500 feet of stacked plays. Where land in the 300-foot thick Bakken sells for $2,500 an acre, Permian acreage can cost 10 times more, according to Prudencio. He knows that breakeven costs for drilling, completion and operations aren’t static.

For example, the Bakken was once at a disadvantage to the Permian because of higher takeaway costs, but that changed when the Dakota Access Pipeline was completed. Now Prudencio said it’s the Permian operators who are facing higher takeaway costs because pipeline capacity to handle rapid increases in oil and gas production is lacking. “Operators are struggling and getting steep discounts to WTI oil prices,” he noted.

Prudencio emphasized other factors gleaned from Wood Mackenzie’s research that tend to break in the Bakken’s favor. For example, in the Bakken, about one barrel of water is produced for every barrel of oil. In the Permian, water production can be three times as great, which is beginning to limit producers’ options for wastewater disposal. The infrastructure investments needed to handle increased wastewater could impact breakeven costs in the Permian.

Second, Prudencio said the company’s research shows that Permian wells tend to have a faster rate of production decline than Bakken wells. “After 5 years of production, what do declines look like?” he asked. “We assume a 5 to 10 percent decline, which the Bakken is in line with. Permian wells are declining at steeper rates, going up to 15 percent. If the model produces less oil, the breakeven is going to go up. Bakken wells perform better for a longer time.”

Another concern Prudencio identified for the Permian is a greater potential for service cost inflation. He sees a more manageable and predictable growth forecast for the Bakken as a factor some investors might find more appealing.

“With the Bakken average breakeven, that’s where things get really interesting and they become very, very competitive,” Prudencio said. “To emphasize my point, the Permian right now is the leading play and gets most of the attention from industry. However, there are some major tradeoffs to growing that much and that fast. We think that’s where Bakken operators and Bakken investors can look to find opportunities and to capitalize on some of those tradeoffs that there are in the Permian.”