Oil & Gas

August 28, 2017

Summer NAPE Expo: Observations & Thoughts

Mercer Capital attended the Summer NAPE Expo in Houston this month.  Founded in 1993 by AAPL, with the addition of IPAA, SEG, and AAPG as partners over the next several years, NAPE is a well-known venue for oil and gas professionals to meet, network, and do business; it was a terrific event.  The Expo also included a conference covering various industry issues.  The session speakers were mostly a mix of company executives and industry analysts, including Wood Mackenzie.  The presentations covered a number of supply and demand issues including:

  • Market efficiencies in light of the low-cost environment
  • Comments on various basins (Permian, Eagle Ford, Haynesville)
  • Continued growth of drilled uncompleted wells (“DUC’s”)

Market Efficiencies

There continues to be a relative market oversupply in both oil and gas.  According to Wood Mackenzie, there may be approximately 1700 TCF of natural gas that could breakeven at $3.00/mcf.  That’s a 20-year supply for the U.S.  LNG is oversupplied because the U.S. is putting a ceiling on LNG prices.  However, there are signs of a move towards more of a balance; for example, we are starting to see some slight inventory drawdowns and the market may find creative ways to create demand for some of these plentiful resources.

 

ngs All of this is being accomplished in light of significant industry capex drops since 2014. However, we are starting to witness growth again in 2017 for spending. This is corresponding with the increase of rig counts. lower48_capex_cuts_region

Basin Commentary

Analysts from Wood Mackenzie noted that the breakeven for new wells in the Permian Basin was at the bottom of the global cost curve.  Some areas of the Permian are at a $35 per barrel breakeven level.  In addition, it was mentioned that the Permian could match the Marcellus shale in natural gas production (to say nothing of oil and liquids) in the future.  This significantly differentiates the Permian Basin in comparison to other plays.

However, the Permian is not the only basin with favorable economics.  Technology and innovation have pushed other areas along.  For example, the Eagle Ford shale play is sustainable at today’s prices and the Haynesville Shale has had a “roller coaster” of activity lately.  Some areas of the Haynesville can model gas as low as $2.40/mcf and still have a profitable well.  BP, Exxon, and Exco all have activity in the Haynesville area.

Continued Growth of DUC’s

DUC’s are growing quickly and the market continues to pay more attention to them.  In fact, the EIA this month included the Anadarko basin for the first time in its DUC data and drilling report.

DUCs Two years ago this metric caught the industry’s attention.  However, there are questions as to exactly how much potential inventory these DUC’s represent.  It was noted that DUC wells may be comprised of lower estimated ultimate recovery (EUR) and may not have as much excess inventory as otherwise thought. In addition, completion crews are taking longer to perform jobs than before (6-7 days as opposed to 4-5).  With drilling times going down and completion times going up, we are seeing a higher DUC count. One other interesting drilling related note from the conference was that an emerging theme (previously rarely, if ever, discussed) on analyst calls for publicly traded companies has to do with the percentage of acreage controlled by companies that is held by production (HBP).  In fact, most of the Permian is 95% HBP – due to decades of prior drilling.  It appears companies want investors to know that there isn’t as much of a requirement for companies to drill going forward.

Takeaways

The marketplace remains excited about the potential for the Permian Basin.  Although there continues to be a supply glut, the U.S. is well positioned to continue to have positive economics due to increasingly efficient operations, technology, and innovation.  More and more basins are beginning to catch up to the Permian in terms of efficiency and rig counts reflect this.

However, our biggest takeaway was meeting and getting to know a plethora of new people.  The conversations were terrific, and we enjoyed getting to know all of you.  We look forward to seeing you at future NAPE events as well.

If you were there, let us know your thoughts and comments about NAPE.  We would love to hear them.  Have a great week!

Author
Bryce Erickson
Managing Director
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EP Second Quarter 2026 Permian Basin
E&P Second Quarter 2026

Region Focus: Permian Basin

The Permian Basin continued to demonstrate its resilience in the twelve-month period through June 30, 2026 (the review period). Despite a modest decline in rig counts, production reached new highs as operators continued to emphasize capital discipline, drilling efficiencies, and productivity improvements. Heightened geopolitical tensions introduced considerably greater volatility into commodity markets during the latter portion of the review period, yet oil prices ended above year-earlier levels and Permian public companies posted strong stock price appreciation. While basin operators continue to balance disciplined capital allocation with long-term production growth, the Permian remains the nation’s premier oil-producing basin and continues to demonstrate its ability to adapt to changing market conditions.
Just Released: Q2 2026 Oil & Gas Industry Newsletter
Just Released: Q2 2026 Oil & Gas Industry Newsletter
Regional Focus: The Permian BasinThe Permian continued to demonstrate its resilience in the twelve-month period through June 30, 2026 (the review period). Despite a modest decline in rig counts, production reached new highs as operators continued to emphasize capital discipline, drilling efficiencies, and productivity improvements. Heightened geopolitical tensions introduced considerably greater volatility into commodity markets during the latter portion of the review period, yet oil prices ended above year-earlier levels and Permian public companies posted strong stock price appreciation. While basin operators continue to balance disciplined capital allocation with long-term production growth, the Permian remains the nation’s premier oil-producing basin and continues to demonstrate its ability to adapt to changing market conditions.
Bryce Erickson Discusses the Changing Economics of Upstream Asset Valuations with Hart Energy
Bryce Erickson Discusses the Changing Economics of Upstream Asset Valuations with Hart Energy
Mercer Capital’s Energy Industry Team Leader, Bryce Erickson, ASA, MRICS, recently shared his perspective on upstream asset valuations in two features published by Hart Energy.Bryce joined other industry professionals at Hart Energy’s 2026 Energy Capital Conference, where he participated in the panel, “Asset Valuations in a High-Price World: Separating Signal from Noise.” The discussion examined how investors, lenders, and operators are assessing energy assets amid elevated commodity prices, increasingly scarce drilling inventory, and continued consolidation across the upstream sector.Markets Turn Their Attention to Tier 2 and Tier 3 AcreageIn a video interview with Hart Energy’s Chris Mathews, Bryce discusses how the scarcity of available Tier 1 acreage is directing greater attention toward Tier 2 and Tier 3 opportunities.As the inventory of premium drilling locations becomes increasingly concentrated, buyers are looking more closely at assets that may previously have received less attention. Higher commodity prices and continued improvements in drilling and completion techniques can make some of these locations more economically attractive. However, broad acreage classifications tell only part of the story. Investors must still examine the specific geology, operating costs, development plans, decline expectations, and risks associated with each asset. Bryce’s comments underscore the importance of disciplined, asset-specific underwriting as competition expands beyond traditionally defined core acreage.How the “Last Cheap Barrels” May Influence BidsHart Energy’s Lisa El-Amin further explores the relationship between inventory scarcity and upstream deal values in “How the Last Cheap Barrels May Be Shaping Today’s Bids” (subscription required).The article considers how competition is shifting toward a diminishing pool of drilling locations capable of generating attractive returns at approximately $50 oil, with much of that inventory concentrated in the Permian Basin. As low-breakeven locations become harder to acquire or replace, buyers may be willing to place greater value on assets offering durable inventory, favorable cost structures, and a long development runway. The result is an M&A market in which bids are increasingly influenced by the quality and scarcity of future drilling opportunities—not simply current production or near-term commodity prices.Valuation ImplicationsTogether, the two Hart Energy features highlight that asset quality and inventory durability are becoming more visible, and potentially more valuable, as the shale sector matures.Determining how these factors affect a particular company or asset requires careful analysis of its reserves, development inventory, cost structure, operating assumptions, and expected cash flows. Mercer Capital has assisted clients with a wide range of valuation needs in the upstream oil and gas industry across both conventional and unconventional plays in North America and around the world. Contact a Mercer Capital professional to discuss your valuation needs in confidence.

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