Permian Basin: A Hotspot in U.S. Oil – 11/10/16

Price trends for land in the Permian Basin, a hot spot for oil and gas drilling, have investors worried about speculation. Despite oil prices being half of what they were before the 2014 price collapse, the price of drillable acres in the oil field has never been higher.

In recent weeks, some have paid upward of $40,000 an acre for drilling leases—about eight times what similar properties fetched two years ago, when oil was worth twice as much.

As companies rush into the area, fears of another boom and bust are palpable. The Permian region enjoys a good infrastructure and workforce, and the costs associated with drilling continue to fall, but there is no consensus that oil prices will rise. Given the difficulties facing the OPEC output cut deal and rising fuel efficiency, many analysts are worried that the expectations of investors are out of sync with fundamentals. Investment banks and the U.S. Department of Energy say any price increase could revive drilling operations in the U.S. which would effectively cap any further rally.

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According to the EIA, U.S. drilling activity is increasingly concentrated in the Permian Basin, which now holds nearly as many active oil rigs as the rest of the United States combined.

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Many of the larger M&A deals that have occurred since 2014 have involved Permian Basin assets.

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