HOUSTON (May 11, 2017) – Exploration and production (E&P) companies that successfully acquired Permian Basin acreage in the red-hot ‘land-grab’ market of 2016, are now faced with the challenge of maintaining premium valuations while meeting high-growth expectations in a rising cost environment, according to new research by IHS Markit (Nasdaq: INFO), a world leader in critical information, analytics and solutions.

“The Permian is the hottest basin going in 2017 due to its deep inventory of profitable locations under a lower oil-price scenario,” said Sven Del Pozzo, CFA, director of energy company and transaction research at IHS Markit. Del Pozzo authored the report, “Permian E&Ps: Execution Risk Looms in 2017; The land grab has taken a pause, now who will create value?

“This profitability has driven many companies to acquire acreage in the Permian land-grab, but now the pressure is on for these companies to create value to maintain premium valuations,” Del Pozzo said. “Most of these acquisitions were almost entirely equity financed at notable premiums by companies that were highly regarded because they were already in the Permian, making seemingly expensive deals affordable without immediate dilution of shareholder value.

“After the group posted stellar shareholder returns in 2016, we believe differences in management, asset quality, company size and cost control -- all have potential to cause stock performance to range more widely in 2017, especially as costs rise,” Del Pozzo said.

Despite the continued economic attractiveness of the Permian Basin, rising service sector costs will raise per-well capex by more than 15 percent during 2017. Costs will continue to place upward pressure on break-evens averaging $5 per barrel in the Permian, according to Imre Kugler, senior consultant at IHS Markit, and author of the analysis entitled “Plays and Basins: Increasing Service Costs Push on Break-evens.”

“The economics for the Permian are still impressive at $41-per-barrel (weighted average) for a $55-per-barrel WTI price-projection, but costs are rising, mostly for service sector-related costs of drilling and completion, proppant, sand and a tightening rig market as utilization rates increase,” Kugler said. “While Permian and Anadarko Basin plays remain in the money, so to speak, lofty acquisition values become more difficult to pay off when the plays require nearly $50-per-barrel WTI to produce a 10 percent internal rate of return.”

Many companies are able to offset rising service-sector costs with increased productivity, particularly in the early life Permian plays, while more mature plays outside of the Permian have reached a plateau, with economics primarily altered by cost, Kugler said. Fortunately for operators outside of the Permian, the lack of infrastructure bottlenecks will place less cost pressure on the Bakken, Wattenberg and Eagle Ford plays.

“Oil price stabilization is creating greater confidence, and pumper calendars are filling up quickly,” said Thomas Jacob, research consultant at IHS Markit. “In the Permian, in particular, we see significant expansion in drilling and completion activity. As a result, we at IHS Markit estimate the play will increase its proppant consumption from 20 percent of the U.S. market in 2014, to 37 percent of the market in 2017.”

Additionally, Jacob said an increase in the number of wells fracked in 2017, and higher frack-sand-mass-per-well assumptions for fourth-quarter 2016 and beyond have led to an astounding 62 percent increase in North American frack-sand demand in 2017. “This year, mine-gate sand prices are expected to increase by roughly 50 percent,” he said, “and in particular, fine-grade sand prices are increasing most significantly. The market share of fine-grade sand increased from 60 percent in 2014, to 80 percent in 2017.”

To speak with Sven Del Pozzo, Imre Kugler or Thomas Jacob, please contact Melissa Manning at melissa.manning@ihsmarkit.com . For more information on the IHS Markit IHS Energy: Companies and Transactions Comparative Peer Group Analysis Report entitled “Permian E&Ps; Executive Risk Looms in 2017; the “land grab” has taken pause, now who will create value?; the Plays and Basins: Increasing Service Costs Push on Break-even; or PumpingIQ reports, please contact Sheana.hamill@ihsmarkit.com .

####

About IHS Markit ( www.ihsmarkit.com )

IHS Markit (Nasdaq: INFO) is a world leader in critical information, analytics and expertise to forge solutions for the major industries and markets that drive economies worldwide. The company delivers next-generation information, analytics and solutions to customers in business, finance and government, improving their operational efficiency and providing deep insights that lead to well-informed, confident decisions. IHS Markit has more than 50,000 key business and government customers, including 85 percent of the Fortune Global 500 and the world’s leading financial institutions. Headquartered in London, IHS Markit is committed to sustainable, profitable growth.

IHS Markit is a registered trademark of IHS Markit Ltd. All other company and product names may be trademarks of their respective owners © 2017 IHS Markit Ltd. All rights reserved.

If you prefer not to receive news releases from IHS Markit, please email melissa.manning@ihsmarkit.com . To read our privacy policy, click here .