Morgan Stanley: Optimism In The Permian Basin

A new report by Morgan Stanley summarized the key takeaways from 2015 Permian Basin Summit in Midland, TX. The summit provided analysts with an in-depth look at the current exploration and production (E&P), service and midstream climates. E&P's well-positioned Not surprisingly, the enthusiasm of the E&P companies at this year's conference was dialed down compared to 2014. However, analysts still see major long-term opportunity for E&P names in the Permian Basin. Despite the weakness of the energy sector, producers highlighted efficiency gains, lower service costs, improving well performance and M&A potential as positives moving forward. Management at Concho Resources Inc

believes that the company is well-positioned to capitalize on M&A opportunities coming in the space. Diamondback Energy Inc

representatives suggested that they would consider increasing activity if prices stabilize and service costs fall low enough. RSP Permian Inc

explained that they believe in protecting from downside price risk with puts, but they prefer to maintain upside to price realizations. Services cutting costs Across the board, operators reported that they are focused on cost-cutting. Analysts indicate that the primary target of reduction has been completion costs, which account for 60 percent of overall Permian well costs. Drilling accounts for the remaining 40 percent. Analysts mention Independence Contract Drilling Inc

as their recommended pure play on the land rig fleet overhaul. Midstream: capacity no longer an issue Prior to the collapse of oil prices, the Permian Basin was one of the major North American development hot-spots. The slowdown has relieved many of the capacity issues that had been building up in the region. "Most producers see limited need for additional processing over the next 12-24 months even if activity were to increase and believe announced crude and NGL takeaway is sufficient with Bridgetex and Cactus coming online," Morgan Stanley analysts explain. Following the summit, analysts still view the Permian as the U.S. unconventional basin with the best long-term growth potential.