U.S. Permian deal frenzy dims U.S. oil output growth prospects for 2024

Oil production in the prodigious Permian shale basin in Texas and New Mexico this year will see the slowest annual growth since 2021.

Story By Stephanie Kelly | REUTERS | Oil production in the prodigious Permian shale basin in Texas and New Mexico this year will see the slowest annual growth since 2021, according to market participants, as a slew of acquisitions reduces activity among private drillers.

Reduced growth in the Permian, the largest U.S. oilfield, will be a drag on overall gains in U.S. production. The slowdown comes even as output cuts from the Organization of the Petroleum Exporting Countries and allies (OPEC+) have supported prices, incentivizing non-OPEC+ producers to pump more.

U.S. oil output reached a record 12.93 million barrels per day (bpd) in 2023. The U.S. Energy Administration this month cut its growth forecast for 2024 by 120,000 bpd to 170,000 bpd, sharply down from growth of over 1 million bpd in 2023.

The Permian is expected to produce a record high 5.974 million barrels per day in February, though that will be the smallest month-over-month growth since July, EIA data showed.

Oil production in the U.S. has been coming in above many analysts’ and government expectations for the last several years, according to an analysis of Energy Information Administration data.

Independent analysts have higher forecasts for Permian growth, and they are well above what the EIA expects for total U.S. production growth. For the year, Rystad Energy forecasts that Permian output will grow by 320,000 to 360,000 bpd, compared with estimated growth of 520,000 bpd in 2023.

Energy consultancy Wood Mackenzie expects output increases of 290,000 bpd.

Slower growth comes as a frenzy of deals in the region has led to tens of billions of dollars changing hands between operators that gobbled up some of the private producers that were most keen to bump output.

Publicly traded producers in recent years shifted their focus to dividends and share buybacks instead of aggressive growth after investors fled the energy sector due to years of low returns.

In 2023, some 39 private companies were acquired by public companies, Enverus data showed.

As public producers absorb private producers, the growth profiles of those assets change to focus on shareholder returns, said Jesse Jones at Energy Aspects.

“The public are not drilling as much as they could,” said Michael Oestmann, chief executive of Tall City IV, a producer based in Midland, Texas. “Their investors now require a certain amount of cash be returned to them instead of invested in new drilling.”

Vital Energy last year acquired Tall City, then called Tall City Property Holdings III, as part of a larger $1.17 billion deal.

Although deal-making in the oil patch is anticipated to slow in 2024, a few private operators could still be swept up, according to Enverus. Privately owned Endeavor Energy, which produces some 400,000 barrels of oil and gas per day in Texas, is up for sale for about $30 billion, Reuters reported in December.

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The oil rig count in the Permian dropped to 311 in December, compared with 350 the year prior, according to EIA data. Year-to-date privately run rigs dropped 17%, compared with an 11% decline in rigs for public companies, data from energy consultancy Enverus showed.

Tall City was running a drilling rig at the time of the acquisition but dropped it when the deal closed, Oestmann said.

“It will likely be late 2024 or 2025 before we add a rig,” Oestmann said.

There are other signs that overall activity is on track to slow this year. The U.S. frac spread count – which measures the number of active hydraulic fracturing fleets – totaled 250 most recently, down by 20 from last year, according to data from Primary Vision.

With U.S. West Texas Intermediate oil prices trading just below $74 a barrel on Wednesday, the potential profits for following an aggressive growth strategy are limited, said Alexandre Ramos-Peon, head of shale research at Rystad.

“It all ties down to the industry being less interested in growth, and more in generating positive cash flows, which they have now done successfully for a few years,” he said.

EIA data showed that oil production in the federal Gulf of Mexico is expected to rise to 1.94 million bpd in 2024, up 70,000 bpd from 2023.

Reporting by Stephanie Kelly; Editing by Liz Hampton and Leslie Adler

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