Houston Chronicle Covers

Houston Chronicle: How a sleepy Texas trust turned into Permian oil proxy war

The trust also hired a public relations firm and proxy contest lawyers, paid for advertisements in support of Cook, and launched a website, TrustTPL.com, to state the case for keeping the trust intact.

Kai Liekefett, Texas Pacific Land Trust’s attorney, blamed the proxy fight on the rise of investor activists — the hedge funds and other large investors who take large stakes in companies and pressure management to take steps to boost share prices. The hedge funds, he said, are interested in selling the water business or even the entire trust to reap a short-term financial windfall.

“It makes perfect sense for them. It may not make sense for the other 75 percent of shareholders who enjoy the out-performance and ongoing appreciation,” said Liekefett, who recently represented financially struggling Luby’s in the Houston restaurant operator’s fight against a hedge fund. “This is not mere luck. This is the result of very seasoned and strategic leadership.”

 

 

The Parent-Child Problem

WSJ: Shale Companies, Adding Ever More Wells, Threaten Future of U.S. Oil Boom

Good read on technology and science at play in the Permian.  This is a reminder that a great deal of what is happening (in my estimation) is still experimental.

Known in the industry as the “parent-child” well problem, the issue is surfacing in shale hot spots across the U.S. as companies ramp up production. Most of the tens of thousands of planned new wells will be child wells—wells drilled close to an already producing well.

It is one of the primary reasons why thousands of shale wells drilled in the past five yearsare producing less oil and gas than companies forecast to investors, a Wall Street Journal examination of drilling data has found.

Shale producers across the country are finding “you can get a lot of interference, one well to the other,” said billionaire Harold Hamm, who founded shale driller Continental Resources Inc., in an interview last year. “Laying out a whole lot of wells can get you in trouble,” he said. Mr. Hamm was discussing other companies, not Continental.

Many of the largest shale producers, including Devon Energy Corp. , EOG Resources Inc.and Concho Resources Inc., have disclosed they are facing the problem. Some have begun drilling wells farther apart to get around it, which means they have fewer total wells to drill on their land.

Odds and Ends

$TPL-specific news is pretty scant as we await dividend declaration and the 10-K.  News from the Permian, however, remains constant.  Here are a few things that caught my eye recently:

MRT: Projected Permian production growth raises water management challenges

Produced water in the Permian Basin is projected to grow 5 percent a year to between 7.5 billion and 8 billion barrels a day by 2025, according to Helstrom.

“Just the amount of produced water coming online will strain the system without everyone working together to find solutions,” he said.

He said the water cut is very high in the Permian Basin, with two to four barrels of water produced with each barrel of oil. If those water barrels can’t be managed, operators may have to shut in wells and limit production, he said.

Reuters: New pipelines drain West Texas crude stocks to four-month low

This will be a theme for 2019

The decline began in mid-November after Plains All American Pipeline LP expanded the capacity of its about 300,000 barrels per day (bpd) Sunrise Pipeline.

The drawdown accelerated this month when Enterprise Products Partners LP began shipping crude on a converted natural gas liquids pipeline, the 200,000 bpd Seminole-Red line, two months ahead of schedule.

Rigzone.com: Permian Frac Scene Could Get Busier Soon

“They talked about improvement and now it was about hyper-targeting completions even more methodically in 2019,” explained Johnson. “Then a crude pricing anomaly happened over the holidays and everyone hit pause.”

Although concerns about market risk and perceived global demand linger, service companies have had the opportunity to put the less frenetic pace to their advantage by refining some of their internal processes, Johnson added.

“With a bit more patience this year operators can have their logistical systems improved (think water and proppant strategy), oilfield services will continue to give further pricing incentives to pump and more pipelines will come online,” said Johnson. “These are all considerations that make both logical and economical sense.”

Although his firm holds the view that much of the downward spiral in crude pricing was algorithmic, Johnson opined that operators “wanted the dust to settle first and see the market act more rationally.” Now, he added, “smart operators” hold the advantage.

“Strategic planning and expert-level execution takes position and timing, all things smart operators have on their side now,” said Johnson. “We’ve heard of stories where the biggest operators in the world have break-evens in the teens and low-20s in the Permian. Kudos to the operators that learned their lessons from the rough patches of last cycle and improved every department under the sun.”

WSJ: Frackers Face Harsh Reality as Wall Street Backs Away

Concho Resources Inc., one of the largest operators in the booming West Texas region, fell more than 13% in the two days last week after it released earnings that failed to meet analyst expectations for cash flow. Concho also said it plans to cut spending 17% from previous guidance, a reduction that would lead to oil output growth of 15% from the fourth quarter of 2018 to the same period this year, instead of 25%.

The bond between U.S. producers and financiers doesn’t appear to be completely broken, and the strongest shale companies continue to attract Wall Street backers. Industry bellwethers such as EOG Resources Inc. have begun to generate free cash flow and don’t need outside funds. They also have locked up land for future drilling locations and have less need to pay out billions for new inventory, a significant source of capital demands in previous years.

DallasNews.com: Permian-fueled shale boom shows little sign of abating, even with capital spending cuts

The tumble in oil prices at the end of 2018, combined with investor demands for fiscal discipline, has prompted most shale executives to only invest what they earn in cash flow, ending years of debt-fueled growth. But the scale of past investments and low service costs mean that the cutbacks will only put a dent in growth projections.

On average, U.S. explorers have cut their capital budgets 4 percent but are predicting a 7 percent increase in production, according to RS Energy Group, a Calgary-based researcher.

Bloomberg: Exxon Partners With Microsoft to Boost Permian Oil Production

Exxon has homed in on the Permian Basin of West Texas and New Mexico as it struggles with dwindling production in formerly prolific oil provinces such as West Africa. The Microsoft partnership, which could add as much as 50,000 barrels of daily output, marks a strategic shift for Exxon, which historically developed technological tools and techniques in-house.

“We realized that we have to do something fundamentally different from a technology standpoint to enable us to grow to meet those volumes,” Anish Patel, Exxon’s leader on the project, said by phone.

JPT: Permian Basin Production Will Grow as Long as Well Productivity Allows It

TPL, among many otber things, is partly a call option on drilling technology.

Occidental has developed a detailed, standardized subsurface workflow that draws on a large company database to evaluate where and how to develop its huge inventory of Permian acreage, said John Polasek, vice president of geoscience for Occidental. The database consolidates its rock and reservoir data as well as results from companies actively working these plays.

Predictions are based on its store of geological, geophysical, geochemical, and petrophysical information. They are compared to the well results. If model predictions are validated by the “actual performance we know we have this figured out,” Polasek said.

Early results are promising. Occidental’s 30-day average production has increased annually since 2012, and it has drilled 26 of top of 50 wells in the basin while drilling 5% of the wells, he said.

Polasek pointed out that those top wells were completed with “25% less proppant than our peers. We feel we have done quite well with less and that is critical to becoming profitable in shale.”

Oilprice.com: The World’s Largest Battery To Power The Permian

Anyone know of a trust with lots of land that could host solar and wind projects?

Texas is also sixth in the top ten U.S. solar states, according to the Solar Energy Industry Association (SEIA).

In 2018, wind power provided 18.6 percent of the energy use in Texas, while wind will make up 23.4 percent of the 2019 generation capacity, according to ERCOT estimates from last month. Solar power is expected to account for 2.1 percent of the 2019 generation capacity in Texas.

Renewable energy and battery storage in Texas is set to increase in coming years. So is oil and gas production in the fastest-growing U.S. shale basin. Booming oil drilling will require more power to the grid and some of it, as odd as it may seem, will be coming from solar and wind power.

Forbes: It’s Not Just The Permian. Super Basins Are A Global Phenomenon

The Permian Basin is the prototype onshore unconventional super basin. It possesses key geological fundamentals in abundance. In addition, the Permian Basin and other North American basins are a fertile cradle of technology. They possess critical factors for innovation: private mineral ownership, a strongly networked community, service company partnerships and immediate rewards for risk taking. The Permian offers hard won lessons from more than a decade that include: addressing needs for energy transport, water handling, sand usage and variations in gas/oil ratios. Building on this experience, other basins can leapfrog ahead.

The Gray Lady Speaks

Last year alone, the Permian’s production rose by a million barrels a day, and it could surpass the Ghawar field in Saudi Arabia, the world’s biggest, within three years. Now producing four million barrels a day, the Permian generates more oil than any of the 14 members of OPEC except Saudi Arabia and Iraq.

As many as 15 oil and gas pipelines serving the Permian are expected to be completed by the middle of 2020, potentially increasing exports from the Gulf of Mexico fourfold to eight million barrels a day after 2021, according to a recent Morningstar Commodities Research report.

“I will have work here forever,” said Mike Wilkinson, a truck driver who came from Dallas a year ago and moved into a trailer with his teenage daughter. “As hard a place as this is to look at, they are going to need guys like me to move equipment around here for years to come.”

With a major acquisition in New Mexico last year, Exxon Mobil became the most active driller in the basin, and projects that it will increase production fivefold by 2025. Also growing rapidly here, Chevron estimates that one in six of every barrels it produces globally will come from the Permian by 2021.

“For Shell, the Permian is absolutely critical,” said Gretchen Watkins, president of Shell Oil. “The Permian is massive; it’s a game changer for U.S. shale. It is the powerhouse field.”

Wayback Machine – Dallas Morning News

The most unusual stock tip I’ve ever gotten

This article from 2012 was linked today in the Yahoo Finance TPL conversation board.  A good one for the archives!

Chief executive Roy Thomas, who offices in downtown Dallas on Pacific Avenue, said the trust still holds about 1 million acres in 20 counties in West Texas. He explained that in the early years after the trust was established, the land was difficult to sell because of its location in the middle of nowhere.

Then the West Texas oil boom hit the Permian Basin in the early 1900s, and this land became more valuable because of the oil and gas royalties. So the trustees back then and now have been in no hurry to sell it.

Even today, he said, the company sells only a few thousand acres every year but makes a bundle in oil and gas royalties. Texas Pacific booked $34 million in revenue last year, and about $14 million came from royalties. That is a 50 percent increase in revenue from the previous year.

“Buying back shares and retiring them is really the main thing we do with our cash flow,” Thomas said. “We only retire shares. The trust is prohibited from reissuing shares or giving me shares because someone thinks I’m doing a good job.”

 

 

 

Safe Haven

Bloomberg: U.S. Shale Becomes Oil Industry’s Safe Haven as Prices Languish

The cost of shale production has fallen so much since then that it’s becoming a safe haven for major oil companies in times of volatile prices, providing rapid, reliable growth and quick returns even with crude trading for just over $50 a barrel, down by almost a third since the start of October.

ConocoPhillips said Monday it’s spending half its 2019 budget in the continental U.S., while Chevron Corp. is investing more at home than it’s done for more than a decade, with $3.6 billion going to the Permian Basin alone. Anadarko Petroleum Corp. and Hess Corp., both global operators, plan to increase spending on their American assets more than 40 percent.

Oil’s recent collapse caused “some different allocation going on within the budget,” Conoco Chief Executive Officer Ryan Lance said on Bloomberg TV. “We’re putting more toward our U.S. unconventional position,” he said, referring to shale.

Production growth “slows down at $50 but I don’t think it stops at $50, and it certainly continues if prices get back to $60,” Lance said. Skeptics thought shale “wouldn’t last long, but it’s here, it’s a huge resource and it’s going to be resilient and long lasting.”

 

Water

Harvard Quietly Amasses California Vineyards—and the Water Underneath

This post is a bit off our normally beaten path but the parallels are interesting.

 

The university’s endowment manager, Harvard Management Co., was stealthily building a sizable grape-growing business on the Central Coast through entities including Brodiaea. With the land, it was acquiring rights to vast sources of water in a region where the earth’s warming is making the resource an ever-more-valuable asset.

In a warming planet, few resources will be more affected than water, as more-frequent droughts, storms and changes in evaporation alter a flow critical for drinking, farming and industry.

Even though there aren’t many ways to make financial investments in water, investors are starting to place bets. Buying arable land with access to it is one way. In California’s Central Coast, “the best property with the best water will sell for record-breaking prices,” says JoAnn Wall, a real-estate appraiser who specializes in vineyards, “and properties without adequate water will suffer in value.”