The three commissioners of Johnson County taped a simple printout on their office wall below the American flag. It was a blue line graph, a projected revenue decline that would be swift and dramatic if oil and gas stayed at current levels. It was the spring of 2016 and the projections, put together by County Assessor Cindy Barlow, were fairly accurate.
A downturn in the oil and gas industry barreled across Wyoming like dark clouds on a bright day. The rig count fell to seven in the spring of 2016. As bad as it was for local and state governments, companies were also suffering, laying off workers and filing for bankruptcy protection.
Prices have since stabilized. The rig count is up to 25 and Wyoming has tightened its belt for the foreseeable future.
But even as a storm was brewing over Johnson County, skies were about to clear in another region of the country. The downturn was discriminate.
Of the 908 rigs operating in the U.S. this week, more than half are in Texas, and 362 of those are in the Permian Basin.
A handful of companies that operate in Wyoming have spoken openly about their Texas-eyed view of the world, and their plans to focus their spending in the Permian rather than Wyoming. The trend begs the question: is the Permian boom draining resources that would otherwise pour into the Cowboy State?
Some experts say it’s not that simple. Others say yes.
Many larger companies are shedding excess weight and zeroing in on premium drilling: wells that can make them a profit as the spot price bobs around $50 a barrel. The move to hunker around core assets has swept the industry. Wyoming, for many larger operators, is not a core area.
But the more nuanced story within the state’s borders is that as some companies are contracting around their key assets in distant plays, others are expanding their existing portfolios into that space. Smaller firms, hoping to flip acreage, are sticking their feet in the door while costs are low and leases are up for grabs. And for those with enough flexibility, the Permian may get the capital expenditures for now, but the Powder River Basin represents a future prospect.
They are gathering up leases and staking their claims in the Cowboy state.
“One of the key plays everyone is talking about as the play in their back pocket for a rainy day is the Powder River Basin,” said Frederick Lawrence, vice president of economics and international affairs at the Independent Petroleum Association of America.
QEP Resources announced recently that it was looking to divest its Pinedale assets after a long history in Wyoming. The company is the sixth largest producer in the Green River Basin for crude, drawing 1.5 million barrels of oil in 2016.
“It’s been a great asset,” said CEO Charles Stanley on a call with investors recently. “It’s been the foundation of the company for a number of years and a platform for growth for us, but at this juncture, we’re running out of inventory to continue to grow production from the asset.”
It’s a trend that’s running industry wide.
“During the downturn you are going to shrink to grow,” said Lawrence of the IPAA. “You’re going to have balance sheets stressed, so you are going to sell off assets. You have a lot of companies saying ‘Here are our top three assets,’ and in a lot of cases they are in the Permian/Delaware.”
Much of that has to do with cost versus return. The ability for operators to keep their heads above water when the price of crude fell below $40 shattered assumptions about what the industry could achieve. A $50 WTI spot price means Wyoming companies are typically dealing with an even lower number, as the state is far from market.
But the industry’s ingenuity is one of the reasons Texas is drawing business. Operators figured out how to work the Permian, which encompasses a broad swath of land in the western part of the state, applying new technology and driving down costs.
A slow transition to unconventional drilling, which had already swept other basins, couldn’t have come to fruition at a better time in West Texas, some say.
“It took a lot of work, but once you saw that transition from vertical well to horizontal well take place in the Permian, you really started to see major improvements on the well productivity, and the break-even was coming down,” said Lawrence.
Many companies fell into bankruptcies in the downturn, but the commodity cycle was also stripping the industry down to its bare essentials. That process is continuing, less painfully than before, as operators adjust.
Even as attention is focused on the Permian, the balance of operations in Wyoming is changing hands.
In addition to QEP’s outlook, companies like Linn Energy and a subsidiary of Devon Energy have also scaled back assets in Wyoming, while Denbury Resources, Jonah Energy and Meritage have stepped in to buy.
Jonah closed on a deal Thursday with Linn to acquire interest in more than 1,200 wells and 27,000 net acres in the Jonah and Pinedale fields. The Denver-based company had been eyeing those assets since its creation three years ago, said Paul Ulrich, director of government affairs for the firm.
“I see an evolution in Wyoming, a significant change of operations in southwest Wyoming in new and old plays that to me means we are on the cusp of good solid growth,” Ulrich said.
The focus on the Permian isn’t bad news for Wyoming, he said.
“When you lose operators and nobody steps in, you just have undrilled acreage, then you should start worrying,” he added.
Linn also let go of non-operated interests in the Salt Creek field north of Casper, which were picked up by Denbury Resources, a company whose focus is on legacy fields and tertiary development.
“That Salt Creek field seems to be very complimentary to their portfolio, and for Linn it was non operated interests so that is probably a good thing,” said Lawrence with the Petroleum Association. “You are seeing Devon selling their midstream assets to Meritage. You are seeing this all over the industry — more specialization.”
Though companies may be letting go of assets that are less profitable, the buyers are likely smaller, and more invested in those acquired acres, wells or interests, he said.
Companies may not be able to spend in Wyoming, but they are still thinking long term. Jonah’s growth, thanks to Linn’s divestment program, has significantly increased their dominance in the region. As companies contract around their best wells and leases, those that can are staking out claims in Wyoming’s PRB for the future. To some, the region west of the Black Hills and east of the Big Horn Mountain Range is virgin territory.
“It’s still rather undeveloped compared to a lot of the other main plays,” said Lawrence of the IPAA. “It’s certainly one that seems to have a lot of oil potential and a lot of the larger independents, whether it’s Anadarko, Devon or EOG are increasingly adding acreage there.”
EOG had limited action in the PRB last year, but in a May call with investors, an executive said the company would increase activities in the coming year.
“In the Powder River Basin, we continue to delineate and analyze this large and complex basin,” said David Trice, executive vice president of exploration and production for the company. “While completions were limited in the first quarter, the results are consistently premium.”
The interest from these larger independents may seem marginal now, but it is something to watch, said Lawrence with the IPAA.
“What are the oil prone regions that companies like EOG have on the end of their presentations?” he asked
The Permian boom isn’t expected to last forever. Despite being a prolific basin, the Department of Energy recently said drilling productivity there had probably reached an apex and would decline. The number of drilled but uncompleted wells is expected to go up. And service companies are saying they will increase prices, which could eventually be good for Wyoming, some say.
“That’s just the thin edge of the wedge,” said Chuck Mason, an oil and gas economist at the University of Wyoming, about increased service costs. “Over the course of time, as the prime spots get drilled and other spots get a little more expensive, then you are going to start seeing people looking around for suitable substitutes.”
Some say Wyoming was the next best thing before the downturn drew attention back to premium plays. Many say it will be again, but likely not too soon.
“Over the course of time, the odds will gradually tip in our favor,” Mason said.
In places like Johnson County, the downturn has tightened budgets. Across the state, governments are winnowing their costs and hunkering down for a prolonged period of lower incomes. But many say the resources that lifted Wyoming, will again. And key oil plays like the PRB still have the attention of many operators in and outside of Wyoming, if not the capital.
“We are like the wallflower at the dance,” said Mason. “Holding up the wall, waiting for someone to say, ‘Ahh.’”
Follow energy reporter Heather Richards on Twitter @hroxaner