Hello energy alpha-seeker!
Today we continue our Gas Infrastructure Series and take a look at the upcoming bottleneck in the Permian, using it to underpin our bull case for gas infrastructure stocks in the short to medium-term.
We’ve already covered:
Today we cover:
ST/MT Driver: The Event-Driven Trade
What we’ve yet to cover:
LT Driver: The Fundamental Case
LT Driver: The Political Backdrop
5 Company Deep Dives to Benefit From These Drivers
The Structure of this post will be as follows:
The Permian
What it Once Was
What its Become
Opportunities Abound
Gas - The Permian’s Forgotten Molecule
Shale Wells are Aging
Historic Parallel
How Markets Will Shape Up Through 2026
Wrap-up
The Permian
What it Once Was
Everyone today knows what the Permian is. But to a lesser extent, what it once was.
The Permian was once the never-ending infinite supply-giving shale layered-cake basin where producers procured endless supplies of capital to go buck wild and drill till their blue in the face.
We talked about this era in our piece here.
After years of funding their drilling frenzy, investors began demanding shareholder returns. They vehemently punished any stock who decided to grow or spend more than they promised. Enough was enough. The regulatory backdrop and OPEC’s fears of the U.S. taking their market share certainly didn’t help. Investors feared they’d never receive a return on their investment.
What its Become
The common thought today is that shale production was killed in 2020 because of COVID. What many seem to forget is the OPEC+ disaster that nearly dissolved the cartel in March of that year.
Saudi flooded the market with crude since Russia refused to lower production in the face of a severe COVID demand shock. They feared U.S. shale companies would continue to take their market share. This was a direct challenge to the Kingdom of Saudi Arabia, who decided to show Russia who the global swing producer really was (and still is!).
Permian oil and gas producers today continue to drill, but the once-revered Permian behemoth is beginning to lose its shine. Top tier well inventories are depleted, wells are getting gassier, and more capital is being spent to combat the steep decline curves shale has been cursed with.
Opportunities Abound
All this has led to a severe lack of investment in the basin. Particularly in takeaway infrastructure. As the gas portion of production in the basin outpaces oil (though both are growing) producers are bumping up against a serious problem that once plagued them back in 2018.
Lack of gas takeaway capacity.
Lack of this critical infrastructure results in local gas prices trading below $0. Yes this means producers will actually pay an infrast4rucuter provider to take the gas off their hands. Or worse. Flare it.
“Why don’t they just stop drilling to avoid selling gas at a loss?”
The primary goal is to retrieve the valuable crude from the shale resource. Gas, for the most part, is just a nice byproduct.
Gas - the Permian’s forgotten molecule
To put in perspective, here is a breakdown of revenues of a typical Permian well over its lifetime:
You can see that in the early days following a well completion, gas makes up just 11% of a well’s revenues. Over the well’s 30 year life, gas slowly creeps up to accounting for 26% of a well’s revenues. Still not enough for producers to be targeting the hydrocarbon directly. You have Marcellus/Utica and Haynesville for that.
Another perspective – a typical Permian well’s production by hydrocarbon over its life: