Breaking the Mold?
Pioneer CEO Scott Sheffield has recently raised eyebrows with his prediction that the Permian will add 100 additional rigs within the next 12 months. Over the past few years, rig adds in the Permian have correlated well with the price of WTI. Lagged regression analysis shows historically a $1 change in WTI adds or subtracts approximately five rigs from the basin. As we discussed in the Aug 19 issue of Data Insights, statements in earnings calls from the 90 top public E&P’s suggested they would add 24 rigs to the basin, right in line with the regressions estimate of 27 rigs. However, the recent buying spree of acreage may break this trend as acquirers are adding rigs aggressively to their new acreage. The graphs on the right compare estimated Permian oil production based on two scenarios: the historical rig correlation tied to the current forward curve (blue) and 100 additional rig scenario over the next 12 months (red). The difference is approximately a 0.5 MBpd oil and 1 Bcf/d of gross gas production by the end of 2018. And while asset location in the basin is important, midstream companies highly levered to the Permian like ETP and PAA are likely to benefit if rig adds break historical correlation to the upside.