The Year Ahead: Company leaders expect strong 2017 for West Texas oil

The Texas flag flies at Endeavor Energy Resources's Big Dog Drilling Rig 22 in the Permian basin outside of Midland, Texas, in 2014.The worst oil market in decades would be hard to spot in West Texas, where two-lane county roads are still jammed with trucks and energy companies are on the prowl for deals.  CREDIT: Bloomberg News photo by Brittany Sowacke.

This is an AP Member Exchange shared by the Odessa American

ODESSA, Texas (AP) — The business of building well pads grinds almost to a halt when the drilling stops.

The Odessa American ( ) reports around February, when oil prices bottomed at about $26 a barrel, Silverado Contracting on Highway 385 found themselves with less than half the 20 workers who turned dirt during the boom.

Kevin Shifflet, the yard manager for the company on Highway 385, said they struggled to find 40 hours of work in a week. He took a pay cut. And when they could, they turned odd jobs like preparing construction sites for office buildings instead of readying prairie for future drilling.

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But that’s changing. And now, after weathering a two-year bust, it appears 2017 will be a busier year in the oil field. Not just for Silverado, but the broader region.

“We went weeks and months without getting bids at times, and now it’s like once a week,” Shifflet said, adding that companies are also moving up deadlines to have the pads ready so they begin work on the wells faster, he said. “It’s really busy out there.”

It’s not just the prep work in the oil field that foreshadows a recovery in West Texas. Other signs include hiring in the region, ongoing land grabs and more and more announcements by oil companies of plans to spend more in the region in 2017. All of that dovetails with a brighter outlook for oil prices following OPEC’s recent announcement to cut production, but it may have happened anyway.

“I believe 2017 is the Permian’s year,” said Joseph Triepke, the founder of Dallas-based research firm Infill Thinking and an Odessa native. “Companies were going to raise spending levels anyway, and OPEC was just icing on the cake.”

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Triepke estimates 150 rigs will be added in the Permian Basin in 2017 if the OPEC deal holds.

More conservatively, the energy intelligence firm Genscape estimates about 40 rigs will be added in the Permian Basin by mid-2017.

“It comes back to the economics of the Permian right now,” said Jodi Quinnell, manager of crude analytics for the energy intelligence firm Genscape. “They are good. They are probably some of the best as you look across the shale plays.”

The Permian Basin’s rig count has already been rising for months.

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After years of focusing on the best performing areas of the Permian Basin and honing techniques from the amount of sand used in a frack job or the length of a laterally drilled well, companies in the Midland Basin can break even or even profit on a well in the oil price range of $45 per barrel, according to Genscape. It’s lower in the Delaware Basin to the southwest.

“Before the OPEC announcement, we definitely thought the Permian was going to be kind of the hotbed of activity, where a lot of the activity would be added back,” Quinnell said. “And over the last seven months, we’ve seen that happen.”

Oil companies have announced billions of dollars of land grabs in recent months, amid rising acreage values, often to add onto the sweet spots where they already focus.

Midland-based Diamondback Energy in mid-December announced plans to buy two sister companies and their acreage in the Delaware Basin in the southwest Permian Basin in a $2.43 billion cash and stock deal. Company officials said the deal supported plans to keep adding rigs in 2017.

Permian Basin-focused companies like Diamondback continue to outperform rivals elsewhere as they have through the two-and-a-half-year bust. And many have announced plans to boost spending in the region in 2017 by about 40 percent, Triepke said, citing averages from 15 companies he tracks.

Many of those budgets were announced before OPEC finalized a deal Nov. 30 to cut overall production by $1.2 million barrels a day to boost prices, with some non-members of the cartel such as Russia agreeing to further cuts.

It reversed a 2014 decision by the cartel to keep pumping, despite oversupply created in part by companies in regions like the Permian Basin, in an effort to win market share.

When the 2014 decision sent prices into a nosedive on Thanksgiving Day two years ago, it took months for the cartel’s decision to show its effects in West Texas through a declining rig count. This time, there may be a similar lag as 2017 budgets take effect and companies add rigs, Triepke said.

“By February, you won’t even recognize this place,” Triepke said.

In the end, economist Ray Perryman wrote, “OPEC blinked.” And the result was a stronger outlook for oil prices even while analysts awaited proof that the OPEC members with a long history of cheating quotas would make good on the agreement to cut production.

Permian Basin oil production, today about 2 million barrels a day, never significantly declined during the bust.

Companies in the region developed technological advances and more efficient techniques, while service companies faced pressure to lower costs, to the point that oil companies found it profitable.

In recent months, supermajor oil company Exxon Mobil discussed with investors a rapid decline in development costs in the Permian Basin that make many of its wells viable to drill at a $40-per-barrel price.

Development costs include costs such as installing production facilities and drilling development wells and completing them. Rival Chevron, for whom the Permian Basin is a priority, reported reducing development costs by 30 percent in the region this year.

Shifflet sees the benefits of such innovations. The bulk of Silverado Contracting’s work has been for Exxon’s shale-focused company, XTO Energy. In recent months, Shifflet said the company began building more and more pads for future drilling near Stanton as the company brought in rigs.

“Right now, as we speak, we are building one pad site that will have five wells on it,” Shifflet said. “We just finished up a three-well pad, moved onto the five-well pad. We have noticed, dramatically, an increase. And most of it seemed to have begun after that OPEC deal.”

Service companies who frack wells are also gearing up for a recovery.

More completion work seemed likely as oil prices appeared to stabilize in the $45 to $50 per barrel range, said Dale Redman, the CEO of the private oil field services company ProPetro based in Midland. But OPEC’s decision suggested higher prices in 2017, solidifying the decisions of many oil companies to move forward with their plans.

Work for ProPetro had already been picking up gradually this year for the company, whose pressure pumping fleet had been 60 percent utilized during their lowest point in 2015.

Now ProPetro’s entire 420,000 horsepower fleet is working. The company is also hiring. Redman said he is still “cautiously optimistic,” but expects to expand in 2017.

“We are looking at building more equipment and adding capacity for our customers’ growth needs, and we are very excited for what’s going to happen in the Permian Basin for a lot of people,” Redman said. “We are expecting some type of nice recovery.”

Mounting signs in Odessa also point to stronger oil field activity in the coming year. “Now Hiring” signs are popping up outside of oil field businesses such as the Halliburton campus on West Murphy Street. Five months ago, the giant service company also had a job fair.

Social media groups like West Texas Oil field Jobs feature ads from companies like Key Energy, which went through bankruptcy but is still shoring up crews in the Permian Basin.

At the Helmerich and Payne yard on Business 20, where photos of dozens of stacked rigs became an iconic symbol of the oil bust, passers-by can count fewer that remain.

One of the men hoping to work on such rigs is 27-year-old James Zdonczyk, a former policeman from Hughes Springs in East Texas who recently had his second interview with H&P for a job as a floor hand in the Permian Basin.

“They said I’d probably be going to West Texas,” Zdonczyk said. “That’s where everything is going on.”

Today, he’s a medical technician, but Zdonczyk said he feels confident about landing the drilling job where he can earn more to support his family. And he said he senses the optimism from talking to the other job hunters, many of whom having experienced both boom and bust.

“That’s what people are saying, beginning of the year it’s going to be a totally different ballgame,” Zdonczyk said. “There’s going to be a lot of rigs going up, and a lot of work going on.”