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Forget the Permian Basin: This Oil Basin Is Where the Growth Is Right Now

Matthew DiLallo, The Motley Fool

The Permian Basin, which stretches across western Texas and the southeast corner of New Mexico, is the fastest-growing oil-producing region in the world. Output currently stands at around 3.3 million barrels per day (BPD) and has increased an astounding 800,000 BPD over the past year, which represents more than half of the worldwide production increase. That fast-paced growth, however, is about to come to a screeching halt because there is only enough pipeline capacity to move 3.6 million BPD. While the industry is building new pipelines as fast as it can, the current bottleneck could last until late next year.

Because the Permian expects to slow to a crawl in the next year, it's opening the door for the Powder River Basin (PRB) of Wyoming to emerge as the industry's new growth engine. That gives producers with land in the region a leg up on the competition, which is why investors should put this area on their radar.

Drilling rigs in the mountains.

Image source: Getty Images.

A monster discovery

Shale giant EOG Resources (NYSE: EOG) has been one of the leading developers of the PRB over the past few years. In May 2015, the company said that it discovered two formations in the PRB -- Turner and Parkman -- that contained high-return drilling locations. However, after increasing its return hurdle rate in 2016, only the Turner formation -- which holds an estimated 200 million barrels of oil equivalent (BOE) -- met its criteria to deliver a premium drilling return.

That didn't stop the company from continuing to explore its vast acreage position in the region. Because of that, the company was able to uncover two more formations that hold a treasure trove of oil resources. EOG announced these discoveries earlier this month, detailing that the Mowry and Niobrara shale plays held a stunning 1.9 billion BOE of recoverable resources, a more than tenfold increase. That put the PRB right behind the Permian Basin and Eagle Ford shale as the company's third-largest asset.

The new growth engine

Chesapeake Energy (NYSE: CHK) is also excited by what it sees in the PRB. The shale driller pointed out in its second-quarter report that the region was "quickly establishing itself as the growth engine of the company." That's after output in the area surged from an average of 18,000 BOE/d at the end of last year to 32,000 BOE/d by mid-July. Chesapeake expects its PRB production to reach 38,000 BOE/d by the end of this year and for it to more than double in 2019 compared to this year's average.

Driving Chesapeake's growth is its focus on the Turner. However, the company is looking at adding another drilling rig next year to possibly explore some of the region's other formations, including the Teapot, Parkman, Sussex, Niobrara, and Mowry. Given EOG's recent success in those latter two plays, Chesapeake Energy's acreage could also hold a treasure trove of oil riches in the region.

An oil pump with rocks in the foreground.

Image source: Getty Images.

Brimming with optimism

Devon Energy (NYSE: DVN) and Anadarko Petroleum (NYSE: APC), meanwhile, have been scooping up drillable land in the Powder River Basin over the past few years. Devon Energy made a bold bet to buy acreage in the area in late 2015, spending $600 million for 253,000 net acres, which more than doubled its position. In the meantime, Anadarko Petroleum recently announced that it had invested another $100 million to lease land in the PRB, boosting its position to more than 300,000 acres.

While both Devon and Anadarko are still in the early stages of developing their acreage in the PRB, they believe it has the potential to be a meaningful growth driver in the coming years. Devon's production in the region is already on pace to grow more than 20% from last year's average. However, with its plan to double its activity level next year, the PRB could emerge as a third growth engine to complement its positions in the Permian and STACK shale play.

Anadarko, on the other hand, is still in the appraisal phase, where it has experienced success tapping into the Turner formation. Newly drilled wells from that play are delivering more than 2,000 BOE/d, with oil accounting for more than 80% of that output. Consequently, the company appears poised to pour more capital into the region next year, setting it up to potentially drive meaningful growth in the future.

It's the PRB's time to shine

With pipeline constraints expecting to slow the Permian down over the next year, several drillers are turning their sights to the emerging Powder River Basin. Given the strong drilling results companies like EOG, Anadarko, Devon, and Chesapeake have delivered this year, it suggests the region could fuel fast-paced growth for producers that operate in the area. Their ability to grow at a time when many rivals can't has the potential to give them an advantage over the competition, which could then enable these oil stocks to outperform their peers in the next year.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.