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Permian Independents Walk a Tightrope

In the Permian Basin, several new infrastructure projects have recently entered service or are expected to start throughout the next year. On the oil side, Cactus II and EPIC have started up in recent weeks, and on the gas side, Gulf Coast Express is expected to start up by late September, ahead of the original October in-service date. For natural gas liquids (NGLs), Grand Prix is in service now and Shin Oak is expected to ramp to full capacity by 4Q19. The addition of these pipelines will boost takeaway capacity and can support production growth, but takeaway capacity is not the only limiting constraint for production growth in the Permian. In times where capital discipline and shareholder returns are at the forefront of investors’ minds, can Permian producers deliver?

As we’ve highlighted previously, investors have been pushing for capital discipline, and that push has altered how capital is spent.  Despite oil price volatility, Permian wells have been largely economic when considering only wellhead breakevens.  The chart below highlights the average wellhead breakeven index for the Permian Basin relative to in-basin pricing. Midland oil prices have been higher than breakevens since late 2017. However, BTU’s breakeven index does not take into account corporate costs like G&A, interest, debt repayment, share buyback programs, or other uses of cash that are necessary to run an E&P company and please shareholders in today’s market.

Diving deeper to look at individual independent operators shows that producers are striving for positive free cash flow and have made improvements.

Current margins leave little room for error as public independent Permian producers walk the tightrope trying to run efficient capital programs by maintaining consistent levels of activity while being responsive to their investors demanding capital discipline in a volatile commodity price environment.  It might just be left to the majors to drive basin growth in the decade ahead.

The growth trajectory in the Permian has enormous impacts on downstream infrastructure and pricing for both oil and natural gas.   To get BTU’s view on the Permian’s future role in US LNG exports, sign up for our upcoming LNG webinar – Getting to the Gulf – Can We Supply Wave 2 LNG?

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