The Permian Re-Emergence

 | Nov 21, 2013 | 3:00 PM EST  | Comments
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oxy

One of my father's favorite sayings was, "You can't teach an old dog new tricks." It is probably a good thing my dad never had to visit modern-day Texas, as he might have had to retire that cliché.

While most of the country continues to struggle through the most tepid post-war recovery on record, Texas cities such as Midland and Odessa are thriving. Both are seeing rapid economic growth, experiencing a population explosion and have unemployment rates below 4%.

The primary driver of this newfound prosperity is the re-emergence of the Permian Basin, which has been a major oil-producing region since the 1920s. Production was thought to have peaked in the 1970s and was running below 800,000 barrels of oil per day by 2008. But by utilizing new fracking technology and other innovations developed in recent years, production is now on a significant uptrend. Oil production has shot up to 1.3 million barrels of oil per day. Capital production budgets have tripled over the last half-decade and it is now projected that the basin will be producing just under 2 million bpd by 2018. Although not quite as economical or as "in the news" as the Bakken or Eagle Ford basins, the Permian is still an important part of the U.S.'s march to energy independence.

The basin also figures prominently in the plans of two major energy concerns refocusing their efforts on growing production in North America.

Apache (APA) is the second-largest oil producer in the Permian. In the last six months, the company has sold overseas assets like its operations in Egypt. In all, it has sold off $7 billion worth of non-U.S. properties. It plans to invest a good portion of these funds domestically and the Permian is a big part of its goal to increase North American production.

The company's shares have added nearly 10% since I profiled its transformation in September. I like what Apache is doing to transform into an energy producer that gets more of its production from geopolitically stable regions. Production from its assets in the Permian is currently growing just under 20% year over year. I would add to my position on any significant pullback in the overall market.

Occidental Petroleum (OXY) is the largest oil producer in the Permian Basin. It plans to spend another $500 million next year to increase production from its Permian assets. Occidental's stock is up some 20% since I called it out in April as one of my favorite turnaround plays in the energy sector.

I like the company's continued headway in becoming a more focused energy play. Occidental is seeking to sell a minority stake in its Middle Eastern assets and has said it will soon decide whether to split off its slower-growing California operations. Investors should react positively to either event when they occur. Occidental's latest quarter beat top- and bottom-line expectations and earnings per share were up 15% year over year. This is confirmation that its new strategic focus is bearing fruit.

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