The rig count in the Permian is and continues to be massive. But unlike the Bakken or Eagleford, most of the rigs have been vertical rigs. These are less expensive to operate, so it has always been a bit tough to compare overall levels of activity between the basins.
But recently there has been a huge increase in the number of horizontal rigs drilling there. According to EIA reports, these are mostly being directed towards Bone Springs, Wolfcamp, and the Midland Basin Spraberry field. I had been aware that the rig count there had been generally inching up, but I had been oblivious to the fact that such a high percentage of them were horizontal rigs. This indicates a huge uptick in capital spend in the basin. Increases in spend may be a leading indicator that returns are improving there, and indeed we have also heard bits of this in the recent earnings reports. Rig count increases have not always been an indicator of highly economic drilling returns, as is evidenced by the rush into the Haynesville shale of 5 years ago or so. But in the case of the Permian, the land is generally all leased up, so there is no land rush aspect to this, and overall companies are acting more conservatively with capital than they were at the height of the shale gas boom.
The valuation of the Permian companies is a bit of a puzzle to me as I've said before. Why should they be valued at such a premium when their returns on capital seem to be below Bakken, Eagleford, or Marcellus operators? I do have significant exposure to the Permian by owning Apache, but this is at a very low valuation compared to the Permian Pure play companies. If I have time this week I'm going to start looking at this region more closely and doing some overview posts.
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