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The ‘Cowboy State’ Oil Boom Is Falling Behind

Tsvetana Paraskova

A year ago, the Powder River Basin in northeastern Wyoming was thought to be the next hot thing in U.S. shale with land acquisition costs lower than in the pricey Permian and oil prices on the rise.

Last year, several companies started to build up acreage in the Powder River Basin, and small exploration firms and private equity-backed companies sealed land deals in the basin.

This year, deal-making has been trickling on a small scale and this muted activity is likely to continue with small deals going forward, oil executives, analysts, and advisors tell Mergermarket’s Nate Trela.

Despite the intensified drilling over the past year and the presence of big listed companies in the area such as Chesapeake Energy, Devon Energy, and EOG Resources, deals in the Powder River Basin are constrained by Wall Street’s reluctance to back mergers and acquisitions (M&A) outside the sweetest spots in the Permian in West Texas and New Mexico.  

Moreover, the Powder River Basin—which has been more popular for its coal production—has yet to show if its tight oil resources can be fracked and pumped at prices that would make profits for the drillers. Recent breakeven price estimates and the current price of oil (WTI Crude at around $52 on August 9) suggest the answer is a resounding no.

“Until the equity markets loosen up and publics are allowed to make acquisitions without a penalty to the share price, we won’t see the big deals,” Peak Exploration & Production’s chief financial officer Justin Vaughn told Mergermarket.

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Jack Wold, chief executive at oil and gas producer Wold Energy Partners, chimed in: “There are deals being done, but we are not seeing the public equity and large assets being involved.”

Deal-making isn’t booming despite the fact that Wyoming’s oil production hit its highest level in 25 years, thanks to new wells, according to the Wyoming State Geological Survey (WSGS).

“These days, especially in Wyoming’s Powder River and Denver basins, production is from tight sand and shale reservoirs where the oil and gas is widely distributed throughout the pore spaces of the rock,” WSGS oil and gas geologist Rachel Toner said in June.

Large shale drillers such Chesapeake Energy, Devon Energy, and EOG Resources announced in their Q2 results earlier this month that they would continue to bet on the Powder River Basin for growing oil production.

Chesapeake said it placed 16 wells on production in Q2 2019 and expects to place 26 wells on production in Q3, focusing more wells on the oil window.

EOG Resources plans this year around 40 net completions in the Powder River, where it has 400,000 net acres in the basin’s core area. EOG Resources’ Powder River Basin plays Niobara and Mowry are competitive in its portfolio which includes the Eagle Ford and Wolfcamp, the company said.  

Devon Energy, for its part, is reallocating US$50 million of STACK capital to the Delaware and Powder River Basins in the second half of 2019, aiming to optimize returns.

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Yet, returns in the various U.S. shale plays and the much talked about breakeven at $50 a barrel oil could be illusive, according to an analysis of consulting firm R.S. Energy Group from the end of last year, cited by The Wall Street Journal

The breakeven price often cited by the industry is $37 a barrel in the Permian, and $46-47 in the Powder River Basin, according to R.S. Energy Group. However, including overhead and other costs lifts the breakeven price to $57 a barrel in the Powder River Basin, and including the cost of land, the all-inclusive break-even comes up at $61-62 a barrel for the basin in Wyoming. For the Permian as a whole, this all-inclusive break-even is $51, the Eagle Ford’s is $57, and the Bakken’s is at a good $64 a barrel, according to R.S. Energy Group data cited by The Journal.

These estimates suggest that drillers are not making fat profits in the Powder River Basin at current oil prices, such that could justify big deals in the area not frowned upon by equity markets.

By Tsvetana Paraskova for Oilprice.com

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