Why You Should Pay Attention to This Texas Oil Play: Devon Energy Corporation (DVN), Linn Energy LLC (LINE)

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While North Dakota’s Bakken shale and Texas’ Eagle Ford shale remain the best-known hotbeds of oil and gas activity in the U.S., another less famous play continues to gain importance. That play is the Permian Basin of western Texas and eastern New Mexico, which, in combination with the Eagle Ford, has propelled Texas oil production to the highest levels since at least 1989.

Let’s take a closer look at the play itself, its major advantages over other plays, and the innovative methods that exploration and production companies are using to maximize the quantity of oil they can get out of the ground.

Devon Energy CorpA primer on the Permian
Measuring approximately 250 miles wide and 300 miles long, the Permian Basin is truly massive. Within it, one can find numerous smaller oil-producing formations, such as the Avalon, Bone Spring, Clearfork, Devonian, Spraberry, and Wolfcamp plays. To readers familiar with companies such as Devon Energy Corporation (NYSE:DVN) and Linn Energy LLC (NASDAQ:LINE), these names should be quite familiar.

Unlike the Bakken and other plays that are — in some ways — overnight success stories, the Permian Basin has a long and storied production history; the play has been producing oil for more than 90 years.

The first well started producing in 1921, and production held strong through subsequent decades, before reaching a peak in the early 1970s at around 2 million barrels per day. Since then, it fell into a steady decline, dipping to a low of 850,000 barrels per day in 2007.

But over the past five years, all that has changed dramatically. Since its 2007 low, crude oil production from the Permian has surged by about 50% to around 1.3 million barrels a day currently. That’s nearly twice as much as the Bakken’s daily production.

A major reason behind this phenomenal resurgence is the improved ability of oil and gas producers to tap tight, unconventional reservoirs through drilling methods such as hydraulic fracturing and horizontal drilling. Initial success applying these new drilling techniques sparked a flurry of interest in the play, with numerous oil and gas producers rushing in to get a piece of the action.

The Permian’s advantages
The Permian is characterized by mature fields, multiple pay zones, relatively low drilling costs, and relatively good access to transportation infrastructure, thanks to its proximity to the U.S. Gulf Coast refining hub. These features equate to several advantages over comparable plays.

One of the most appealing features of producing formations within the Permian Basin is what the oil and gas industry refers to as “stacked pay potential.” The term refers to two or more producing formations that are stacked vertically on top of each other, which allows E&P companies to produce oil from varying depths using just a single vertical well.

Multiple vertically stacked pay zones allow for improved well economics, which allows E&Ps to produce reserves that would otherwise be considered uneconomical. For instance, Devon Energy expressed its optimism last year about the superior economics of a Permian play called the Cline Shale, otherwise known as the Lower Wolfcamp formation. In an investor presentation last year, the company identified as many as 15 producing zones within the stratigraphic section of the Cline Shale.

Techniques being used in the Permian
One of the most undeniable trends across the North American E&P space is companies’ desire to do more with less, and the Permian serves as a classic example. In addition to shallow vertical drilling, numerous E&Ps are drilling at deeper depths, using a great number of frac stages, downspacing (reducing the spacing between wells), and using enhanced oil recovery methods to boost production and cut costs.

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