The Next Best Investments in Oil Come From This Texas Sweet Spot

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As I wrote up this analysis of the best investments in oil, a familiar saying came to mind: "Everything old is new again."

A truer statement could not be said about the Permian Basin, which is a geological formation roughly 300 miles long and 250 miles across that stretches across west Texas and eastern New Mexico.

It has been producing oil (29 billion barrels worth) since 1921. But even as recently as a decade ago, it was thought to be played out.

That was before new drilling technologies such as fracking were considered for use in the region. Nearly 48% of all drilling rigs in the country are drilling right now in Texas, with over 400 drilling rigs in the Permian Basin alone.

No wonder then that oil production in Texas doubled in the past three years to the highest level since the 1980s...

Texas Railroad Commissioner David Porter thinks the production potential from the Permian Basin is huge. He was quoted in the Financial Times as saying, "If the United States achieves energy independence, it will be because of the Permian Basin."

And that means some of the best oil investments will be focused in this region.

Permian: Better than the Bakken's Best Investments?

The Permian Basin once again is one of the centers of U.S. oil production, along with the Eagle Ford shale formation in south Texas and the Bakken/Three Forks shale formation in North Dakota.

International energy analysts Wood Mackenzie forecast that production in the Bakken could reach 1.5 million barrels a day by 2025 and production from Eagle Ford could reach 1.35 million barrels a day.

Wood Mackenzie thinks the Permian has even more potential.

It believes oil production from the Permian Basin could reach as high as 3.5 million barrels a day by 2025.

That estimate may be possible as new drilling technologies have begun unlocking parts of the hydrocarbon reservoir that are absolutely huge.

Leonardo Maugeri, formerly of Italian oil company Eni and now at Harvard, put this number on what he thinks the Permian Basin holds:

50 billion barrels of recoverable light oil.

But it could be even larger. . .no one is exactly sure how much recoverable oil is actually there.

Pioneer Natural Resources (NYSE: PXD) is one of the leading acreage holders and drillers in the Permian Basin. Its CEO, Scott Sheffield, told the Globe and Mail, "This is the second-largest [oil] discovery in the history of the world."

Saudi Arabia's Ghawar field is the largest; Sheffield also believes there is at least 50 billion barrels of oil there.

The region is getting noticed around the world, too. The Australian Financial Review recently said "Oil production from the Permian Basin would speed America on its path to topple Saudi Arabia as the largest oil producer, slash US imports. . .and even make substantial US oil exports feasible."

The real excitement centers around the fact that newer drilling techniques have just begun to be used on the shales of the region such as the Delaware, the Wolfcamp (where Pioneer has the most acreage) and the Cline. Most of the rigs in the area are still drilling the traditional vertical wells.

In addition, the Permian Basin is ideally located near major Texas refineries. This makes it feasible to ship oil production to the refineries via trucks if pipeline space isn't available.

Best Investments in the Permian Basin

The region's potential has attracted some of energy's biggest names - and wallets.

Exxon Mobil Corp. (NYSE: XOM), through its purchase of XTO Energy, is there. BHP Billiton Ltd. (NYSE ADR: BHP) is also there. Royal Dutch Shell plc (NYSE ADR: RDS.A) acquired a nice-sized stake in the Permian last autumn from Chesapeake Energy Corp. (NYSE: CHK) for $2 billion.

Chevron Corp. (NYSE: CVX) is perhaps the most aggressive of the majors there with leases on about two million acres. It is building a local headquarters in Midland, TX at the heart of the Basin.

The company's vice-president of its mid-continent business, Alan Kleier, told the Financial Times, "It's an exciting place to be right now. This really is a rebirth [of the Permian Basin]."

But the real interesting plays are the medium-sized companies like the aforementioned Pioneer Natural Resources. It actually had the enviable problem of having too much high potential acreage to explore with not enough money to do so.

So in January, it struck a $1.7 billion deal with China's Sinochem. The Chinese are supplying the cash in return for 40% of the company's acreage and a joint effort in developing the Wolfcamp shale formation. Sinochem is a Chinese conglomerate involved in the chemicals, energy, agriculture, real estate and financial industries.

Pioneer Natural Resources also happens to be a favorite of George Soros. A look at his portfolio at the end of the first quarter by Forbes showed PXD to be his top position. It was also the stock he added to the most in the quarter.

Soros only established a position in the company in the third quarter of 2012 and has an average gain now not far from 50%. 

For investors looking for income, SandRidge Permian Trust (NYSE: PER) may be worth a look as it is a favorite of Money Morning Global Investing Specialist Martin Hutchinson.

PER is a trust formed in 2011 by SandRidge Energy to own royalty interests in 509 producing wells and 888 development wells in the region. It owns 3.2 million barrels of oil reserves. The trust pays a quarterly dividend and currently yields over 13%.  

Get the rest of Hutchinson's favorite income stock plays like SandRidge in this recent investment analysis: "Secret" Double-Digit Income Stocks

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