After yielding billions of barrels of crude over a 90-year time span, the Permian Basin had gained a reputation as being played out with little oil and natural gas left to offer.
“I’ve spent a fair amount of time marketing service companies,” said Eric Kern, vice president at Allegiance Capital Corporation, a mergers and acquisitions financial services advisory firm. “The Permian Basin had gotten the reputation that it was a tired oil field.”
In fact, he acknowledged some challenges marketing Permian Basin companies in 2012, with some deals being held over in 2013. But now, interest is picking up as the basin is seen as a dynamic shale play.
Kern sees two issues both challenging the oil and gas industry and offering opportunities: Water and infrastructure.
“In the Permian Basin we’re seeing a number of companies pop up around water management,” he said as he attended the DUG Permian Basin event in Fort Worth. “There is more and more interest in fluid management — it’s a hot new area for mergers and acquisitions.”
Technological advances in horizontal drilling mean longer laterals, he noted, which means tighter spacing for hydraulic fracturing stages, resulting in more water being used in the completion process.
While the amount of water used in hydraulic fracturing is nominal compared to other industries like agriculture, he said, it’s still a concern long-term.
In West Texas, Kern added, “the question is recycling water and finding better ways to manage fluids. There’s a lot of capital moving in that direction.”
The second area attracting capital and activity, he said, is pipelines and gathering systems.
“Pipeline construction or service will draw a lot of interest,” he predicted, especially for businesses in the lower middle market.
In fact, he said, he had recently spoken to a man who had previously worked in civil construction but now is very active in building pipelines in the Permian Basin. That is an example, he said, of how companies that had been working in other areas have adapted to meet the demand for Permian Basin pipelines, gathering lines and tank batteries as well as water and fluid management technology.
Right now, Kern said, producers are having difficulty moving their production to market. His company, which specializes in privately-held, closely-held businesses in the lower middle market, has been spending time in both the water and fluid management and the pipeline sectors.
“Whenever you get an area where there are needs or potential for growth, capital flows there,” he said.
Pipelines, he said, will be critical as a rising rig count means more production from the Permian Basin. “There’s a lot of oil being produced that wasn’t being produced,” he said.
“There are more rigs going up, more horizontal drilling, too,” Kern said. “In 2011-2012, operators were going deeper into the Wolfcamp, now more and more are drilling horizontally.”
There have been good results, and disappointing results, he noted. “Any time you push the limits of a system, there will be failures.” Texas, he said, is an entrepreneurial state and there are a lot of people working to address the issues.