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Fears that the Permian Basin is drying up sooner than anticipated has sent the stocks of major U.S. oil producers tumbling. Concerns over America’s fastest-growing oil field, where almost half of the rigs currently drilling in the U.S. are located, arose as one of the Basin’s major players unveiled some disconcerting news at the beginning of this month, according to the Wall Street Journal
Plunging Share Prices
Pioneer Natural Resources Co. (PXD), as a part of its earnings report issued on Aug 1, indicated that its Permian wells are producing larger than expected amounts of gas and natural gas liquids like propane. Shares of Pioneer plunged as much as 13% following the report. As of Aug 10, the company’s stock price is down about 17% since the report and down nearly 25% since the start of the year.
Other major players within the Permian Basin, including Parsley Energy Inc. (PE) and Concho Resources Inc. (CXO), also saw their share prices drop. Parsley’s stock price is down about 13% since the beginning of the month and down almost 28% since the beginning of the year. Concho’s shares are down nearly 12% since August 1 and down just over 12% year-to-date (YTD). (To read more, see: Why U.S. Shale Stocks Are Ailing.)
The reason Pioneer’s report has been so worrisome to investors is that, while it is normal for wells to produce natural gas as a byproduct in the oil extraction process, a higher than expected gas-to-oil ratio is an indicator that the well’s oil reservoir is becoming depleted faster than expected.
For investors that have piled money into not just Pioneer but other Permian producers as well, their fear is that Pioneer’s report could be a warning sign that, for the industry as a whole, the Permian oil fields won’t be quite as plentiful as hoped.
Since the beginning of 2015, North American oil and gas producers have raised around $62 billion through the sale of new shares. As much as 44%, or $27.5 billion, of that new money has gone to Permian producers, according to the Journal. (To read more, see: Guide To Oil And Gas Plays In North America: Shale.)
Skeptics and Supporters
While there has always been skeptics who have questioned the oil recoverability rate in the Basin, the recent selloff suggests that investors who may have been overconfident about the Permian’s prospects are pulling back a bit as their expectations sober.
Still, some believe the fears are overblown and argue that despite the higher than expected amounts of natural gas and propane, oil production remains in line with expectations. Both Pioneer and Parsley told the Journal that oil volumes are in-line with expectations. For them, the natural gas is an added bonus to revenues.