A Colgate Energy oil drilling rig in Reeves County, in the Permian Basin in west Texas. Picture: BLOOMBERG VIA GETTY IMAGES
Capital markets are taking notice. ConocoPhillips announced on Monday that it would buy Concho Resources for about $9.7bn in stock, helping consolidate the two companies’ acreage in the Permian. Just three weeks ago, Devon Energy spent $2.56bn in shares buying WPX Energy, building its position in one of the lower-cost districts of the Permian.
Thanks to the slump in interest rates this year, investment-grade energy companies can borrow as cheaply as at any point since before the last oil price crash in 2015, based on the pricing of option-adjusted spreads. Meanwhile, junk-rated energy debt has settled at far higher rates, increasing the advantage for the big end of town.
Once borrowing costs are brought under control, it’s not nearly such a challenge to keep pumping out barrels. The “fracklog” — drilled but uncompleted wells that could be put into action the moment prices rise far enough to cover their operating costs — remains at elevated levels, with July seeing a record number in the Permian Basin. Working through that will be enough to sustain output for some time, even in the absence of aggressive drilling activity.
The Hail Mary pass made by the world’s oil exporters in March was that a flood of output would be sufficient to squash the US oil patch for good. That would give Opec members a chance to build their market share, helping them prop up prices through the inevitable decline of oil demand as the world decarbonises.
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