The Permian Basin Still Has Plenty of Room to Run

May 02, 2019

Matthew DiLallo | The Motley Fool | April 14, 2019

The Permian Basin is a gift that keeps on giving. Oil producers have pumped out an astounding 30 billion barrels from the region since its discovery in 1921. However, an estimated 46 billion barrels of recoverable oil remain on the Delaware Basin side alone. The region has decades of growth ahead.

An oil growth engine of epic proportions

Oil output in the Permian currently averages around 3.85 million barrels per day (BPD), according to data from midstream giant Enterprise Products Partners (NYSE:EPD). However, it's set to grow by nearly 1 million BPD over the next year and should reach almost 8 million BPD by 2025. That's an incredible 107% increase for what's already one of the largest oil fields in the world.

One of the many companies driving this growth is ExxonMobil (NYSE:XOM). The oil giant is currently using the Permian Basin as one of the main fuels driving its strategy to more than double its earnings and cash flow by 2025. The region is turning out to be even better than Exxon had hoped. The company now expects to pump out 1 million barrels of oil equivalent per day by 2024, 80% more than its prior forecast. That's leading Exxon to spearhead pipeline projects so that it has the infrastructure needed to move this oil toward its refineries along the Gulf Coast. That led it to team up with Plains All American Pipelines (NYSE:PAA) to build the 1 million BPD Wink-to-Webster project. That pipeline is one of many Permian-focused oil infrastructure projects that Plains All American Pipelines and others currently have under way to improve the flow of crude out of the Permian.

Oil isn't the only liquid coming out of the Permian

While oil grabs all the headlines, it's not the only valuable liquid coming out of Permian wells. The region is also a key supplier of natural gas liquids (NGLs). The Permian currently pumps out 1.6 million barrels of NGLs per day, which is about 30% of the country's output. That number is on track to surge more than 113% by 2025, according to Enterprise Products Partners' forecast.

That's leading companies like Enterprise to build the infrastructure to transport and process these valuable liquids. The company recently finished construction on its Shin Oak pipeline, which moves raw NGLs to its fractionation hub in Mont Belvieu, Texas. Those facilities separate the NGL stream into pure components (ethane, propane, butane, and natural gasoline). They then flow to petrochemical plants operated by ExxonMobil and others, which turn them into plastics and other more valuable products.

Don't forget about all the gas

Another often overlooked energy commodity from the Permian is natural gas. The region currently produces 10 billion cubic feet per day (Bcf/d), which is about 11% of the country's output. Drillers are unlocking so much gas that they need to burn some of it off, since there aren't enough pipelines to move it out of the region.

That should change later this year, when Kinder Morgan (NYSE:KMI) and its partners finish the Gulf Coast Express pipeline. The $1.75 billion-project will move 2 Bcf/d toward the coast. Kinder Morgan is following it up with an even larger one backed by ExxonMobil. The Permian Highway Pipeline, which will cost $2.1 billion and move 2.1 Bcf/d, should come online in October 2020.

The region, however, will need more gas-related infrastructure since its output is on track to top 21 Bcf/d by 2021, a 110% increase from the current rate. That's why Exxon is working with another midstream company on a new regional line. Meanwhile, Kinder Morgan and others have their sights set on building more long-haul pipelines out of the region as well as other gas-related infrastructure. These pipelines will move this gas to petrochemical complexes along the Gulf Coast as well as export it to Mexico and through liquified natural gas facilities.

A high-octane growth region

The Permian Basin has been fueling oil companies for nearly a century. However, it still has plenty of growth ahead, given the view that the region's output will more than double by 2025. That fast-paced growth is why investors should consider adding high-quality Permian-focused stocks to their portfolio.