In five years, the Permian is forecast to generate 32 million barrels of produced water per day, up from four million a day currently. By 2030, that number could rise to 38 million barrels daily, analysts say. And it will be increasingly difficult to dispose of the wastewater. Industry analysts say the basin will eventually run out of suitable places to drill disposal wells — another incentive for oil and gas operators to recycle.
From the Raymond James report linked above:
In our forecast and this piece, we have placed an undue focus on the Permian basin, particularly the Delaware. While most readers will know it is the heart of U.S. oil activity, there is a particular reason why it is top of mind for produced water. New wells in the Delaware Basin are coming online with water-oil-ratios as high as 10-to-1, a level of water production typically exhibited in a decades-old conventional well. Across the basin, initial WORs of 4 or even 6-to-1 are viewed as “normal.” This is in contrast to other prolific shale basins such as the Midland, Eagle Ford, and Bakken, where WORs start at a 1-2x range, and expand slowly to 2-5x. In the graph on the left, we forecast water production grows to over 32 million barrels per day by 2025, for a CAGR of 10% over the period. As the Permian basin shifts further into manufacturing mode, the water growth we project will create the need for nearly 1,000 additional salt water disposal wells by 2030. Even taking an impossibly bullish outlook with water recycling (100% of frac water coming from recycling), we will still need ~750 additional disposal wells in the Permian Basin (more on this below). By 2030, we predict there will be a total need for ~1750 salt water disposal wells, assuming 80% utilization. While many companies involved in SWDs cite 80% as their target utilization, water pressure at the surface and in the formation can limit disposal capabilities, meaning demand for SWDs may be closer to 3,000 under realistic utilization assumptions. This incremental demand for SWDs we estimate represents a $7-$9 billion dollar investment in the Permian Basin alone.
My way of backing into water. Back non-water revenue out of EBITDA. Add “old expenses” and legal (big $$$$) to the adjusted EBITDA number to get a ballpark water income. Look at water income relative to water top line to observe expenses and margins.
Seperately we can look at margin without asset sales.
Both margins are contracting.
It is understood that one has to spend money to make money, expecially in the water business, but I’d love more information on the end game.
Probably not a space where you want to be half pregnant.
“A lot of it comes down to what level of control that the exploration and production company wants to have over water,’ Duman said. “There are extreme cases where some operators want to wash their hands clean of it and let a third-party company take care of it all. On the complete other end of the spectrum, you have companies like Pioneer Natural Resources that have their own water subsidiary that handles their volumes with dedicated resources.”
Water has become such a large business in the oilfield that it now has its own conferences. Earlier this month, hundreds of industry professionals attended the Produced Water Management Conference at the Westin Galleria in Houston where recycling was a frequent topic of conversation.
Looking ahead, the industry is ripe for consolidation. Midland oilfield water management company XRI bought the water recycling arm of Dallas-based Fountain Quail Energy Services in April. Financial terms of the deal were not disclosed but XRI CEO Matt Garbiel said the industry is looking to become more sustainable.
“Our customers are realizing very quickly how cost-effective our technology is compared to more costly saltwater disposal infrastructure and services,” Gabriel said. “It is an exciting time for our company to be at the forefront of reshaping water management in the energy industry through sustainable and economic water reuse solutions.”
In the 1920s, an oilfield accident near Big Lake, Texas sent billions of gallons of produced water to the surface, making the land unsuitable for vegetation and animal life. Known as the “Texon Scar,” the damage can still be seen from outer space nearly 100 years later.
“Any landowner will tell you that they’d rather have an oil spill on their land than a produced water spill,” Leyden said. “It’s much easier to clean up an oil spill. Produced water has salts and other compounds that are difficult to remove.”
Full Bloomberg article linked above.
An obscure Texas company has bid $450 million to acquire the Hanging H Ranch in one of the state’s most desolate corners, aiming to make a big splash amid booming demand for water in the world’s busiest oil patch.
RRIG Water Solutions LLC has signed a letter of intent with the family that owns the 67,500-acre ranch located in West Texas, according to marketing materials from Jefferies Financial Group Inc., which is arranging financing for the deal. A representative for RRIG did not return messages seeking comment.
Drillers spent $11 billion on water management in the region last year and that’s set to grow to $18 billion in 2021, according to research firm Oilfield Water Connection LLC. RRIG already owns a 475-mile (764-kilometer) water pipeline in the Permian area that it acquired for an undisclosed sum in 2017.
The ranch is actually made up of a patchwork of parcels straddling three Texas counties: Reeves, Jeff Davis and Loving. Reeves and Loving counties alone produced about 600,000 barrels of crude a day last year, according to GlobalData Plc, more than OPEC member Ecuador.
One of the ranch’s most attractive assets is its location right up against the New Mexico border. Texas has less-stringent water-sale rules than its neighbor. In order to confirm that the ranch is rich in water, Lindsay said he had to drill wells.
Singapore sovereign-wealth fund GIC has bought a stake in WaterBridge Resources LLC in a deal that values the Houston-based handler of oil-drilling wastewater at nearly $3 billion including debt, according to people familiar with the matter.
GIC bought 20% of the company from Five Point Energy, a Texas investment firm that started WaterBridge in 2016 with $200 million of seed money, one of the people said.
The deal—and the lofty valuation for the three-year-old company—highlights the rising importance of businesses that handle the lakes worth of briny, polluted water that energy producers extract along with oil and gas when they hydraulically fracture shale and other rock formations. While big investors have flocked to West Texas for its prolific oil wells, they are now scrambling to manage the cruddy water spewing out of the wells at much greater volumes than crude.
You’ll recall that this blog started as a scrapbook of sorts. Fun/interesting read here.
The 1) wording around the opportunity and activity of the water business in the 10-K combined with 2) the capital spending on the water biz and 3) big hikes in executive comp are all signs (in my mind) that $TPL is going to get extremely aggressive with water.
This may be obvious to others but I think they are going to be more water-forward than most investors expect.
You don’t pay your top two dudes $2mm+ each to collect royalty checks and do small ticket land sales. More is happening here…
Kermit is directly east of $TPL’s surface land in Loving, Reeves, and Culberson counties. The quote below speaks to the sheer amount of physical activity in the Permian right now.
With the increase of 18-wheelers and other vehicles on the roads of the Permian Basin, Prentice said the refinery will take advantage of locally produced crude oil and sell the gasoline and diesel locally.
“If the refinery were in operation right now, every single barrel would be sold within 100 miles,” Prentice said. “There’s been such an increase in demand.”
This is some of the end-of-2019 capacity we’ve been hearing about.
As construction for the 850-mile Gray Oak Pipeline draws to a finish, a joint venture led by Phillips 66 Partners has teamed up with Houston pipeline operator Kinder Morgan to move crude oil to more destinations.
Designed to move 900,000 barrels of crude oil per day by the end of the year, one of the end points of the Permian Basin to Gulf Coast pipeline is the Phillips 66 Sweeny Refinery in Brazoria County.
I may have saved the best information for last here. Important to know that Solaris started its build out in 2015/2016. Two year head start relative to $TPL.
Launched in November 2015 and financially backed by the private equity firm Trilantic Capital Partners North America, Solaris Water Midstream sources and delivers freshwater to drilling operations and moves and recycles oilfield wastewater.
The company reports having 16 current customers already either connected or in the process of connecting to its Pecos Star System.
A subsidiary of Marathon Oil Company signed a long-term contract for water services in a 369,000-acre area of Lea County, New Mexico that will allow for a 125-mile expansion of the Pecos Star pipeline network.
Once the construction for the expansion is complete, the Pecos Star System will include more than 300 miles of large diameter permanent pipelines and more than 200 miles of temporary pipelines.
We’ve heard this story before. Substitute TPL and EOG for Waterfield and Anadarko.
Waterfield is led by Co-Chief Executive Officers Scott Mitchell and Mark Cahill, who previously built and led Anadarko’s and Western Gas’s Permian Basin commercial water infrastructure platform. Since partnering with Blackstone last summer, Waterfield has put together a highly skilled team that brings together upstream and midstream technical expertise with a deep understanding of the subsurface and operating characteristics of the Permian Basin. This expertise positions Waterfield to provide reliable, turn-key services for its customers.
Waterfield’s progress should be of interest to TPL follows as there are parallels between the two entities. Waterfield appears to be well capitalized and has a strong management team; looks like prime competition.
“It used to be (water management) was trucking water to saltwater disposal wells. Then the next generation was to pipe water to SWDs to get trucks off the road and enjoy the economic benefits of pipelines,” said Cahill, an engineer who got his start at Chevron. “I think we’re entering the next phase, where you’ll see subsurface expertise. It’s not just pipes and facilities but knowing where you’re putting the water and how you’re putting the water,”
“The eye-opener for us was when we were talking to other producers and we were talking about our focus on the subsurface, and no one else was looking at the subsurface,” Mitchell said. “That gave them comfort things would be done right. It dawned on us that this is how it will be done.”
He said producers have been reluctant to grant water management to other companies “because it’s so critical and it has to be done right. They know the subsurface, so they’re reluctant to hand it off to someone without that expertise.”
Already, Waterfield has a 15-year contract with Guidon Energy to construct a new system to handle Guidon’s water gathering and disposal needs across its 40,000-acre position in Martin County. That system, which will target deeper disposal zones, is expected to come online by mid-year. Waterfield also has an agreement with EagleClaw Midstream to operate EagleClaw’s Reeves County water assets — 58 miles of gathering lines and 390,000 barrels per day of permitted water disposal capacity.
Those contracts have met the company’s goal of “planting our flag, getting a platform in the Midland Basin and the Delaware Basin,” said Cahill.
15 year contracts are music to my ears.
Rude and crude analysis warning. I was looking at 4Q and was thinking that net income looked fairly light relative to revenue so I did a little digging and confirmed my suspicion.
The top analysis attempts to isolate the water business to determine profitability. We start with net income and add taxes back in to get an EBT. EBT is then reduced by TPL’s legacy “low expense” businesses (Royalty, Sundry, and Sales) to get towards earnings from the water business. This new adjusted EBT number is further adjusted by adding back an estimate for the expenses (2x 2016 full year expenses) of the “low expense” businesses. The result is something that might approximate income generated by the Water business. Water’s reported top line can be compared to the water income estimate to get a picture of what Water’s expenses and margin look like.
The conclusion is that Water’s expenses were up significantly in 4Q which drove the estimated margin down to ~21%. Lots of assumptions and brute force in here. Everything highlighted in green is a custom creation.
The bottom analysis gets to ongoing margins more directly. Here we compile the revenues from Royalty, Sundry, and Water and compare them to a “non-sale” income number that is generated by adding taxes and proceeds from asset sales back into net income. Adjusted income / adjusted sales = margin of repeating buiness. This analysis too points to materially lower margins in 4Q.
Where’s that margin going?
Update: Quick update 15 minutes after posting. Please take some time to look at the column all the way to the right. Margin compression or not, $TPL is on fire. Oh, and thank you Mr. Taxman.