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Has the Permian Peaked? Wall Street Worries About Its Sure Thing

The Wall Street Journal. logo The Wall Street Journal. 8/9/2017 Alison Sider
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Investors are getting nervous about the Permian.

The problem? Too much natural gas.

The west Texas oilfield is the epicenter of U.S. drilling activity and is expected to drive the country’s growth in oil production in the coming years. Investors have grown accustomed to companies reliably beating expectations there--producing ever greater amounts of oil and slashing costs.

So they became alarmed when a handful of Permian producers reported more lackluster results last week.

It began when Pioneer Natural Resources Co. reported that its Permian wells are producing more gas and natural gas liquids like propane than expected, raising red flags for investors who care a lot more about oil.

Pioneer said its wells aren’t producing less oil than its engineers predicted--just more gas. Analysts and some investors say if anything, all that gas is basically a free byproduct that will make the wells more valuable.

“When we boil this down, oil is absolutely meeting our expectations on a per-well basis, and adding more gas and NGLs to the mix is a positive in terms of revenues and reserves without even affecting oil,” Chief Executive Tim Dove told analysts.

The explanation didn’t seem help. Pioneer shares, trading under the ticker PXD, tumbled 17% over two days last week, and they haven’t fully recovered.

Goldman Sachs wrote that investors started asking where else to park their money.

“The sharp sell-off in bellwether PXD triggered risk reduction across well-owned and perceived high-quality Permian pure-plays,” the Goldman analysts wrote. The price premium for Permian producers compared to oil companies that focus on other regions shrank by 14% after Pioneer reported its results, Morgan Stanley analysts said Monday.

Analysts were quick to defend the Permian, saying the gassy allegations were just hot air. But the shift toward more gas output illuminates what is potentially a deeper issue: fewer new wells.

“We think it’s execution risk that’s the culprit,” said Scott Hanold, an analyst at RBC Capital Markets. “The Permian is going to have some growing pains.”

In a report titled “The Permian Remains an Oil Play,” Morgan Stanley analysts noted that wells tend to produce more natural gas as they age. That phenomenon has been hard to see in the Permian as companies have been growing at breakneck pace, drilling new wells that are flush with oil.

But during the second quarter, some companies said they’re slowing down. Pioneer said unforeseen drilling delays put it behind schedule this year. Rather than shelling out the cash to catch up, the company plans to defer completing about 30 wells until next year. Parsley Energy Inc. said it had delayed eight wells—part of the reason for the gassier production it reported during the quarter.

“Given the high oil cut associated with flush production, these delays impacted our mix as well,” chief executive Bryan Sheffield said during an earnings conference call.

Analysts at Simmons & Co. International said the “frenzied rate of activity expansion” could be to blame for some of the challenges that producers faced during the quarter.

“One lesson, of which we were often reminded during the quarter, is that it's significantly easier to grow production in spreadsheets than the oil patch,” they wrote.

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