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Skyrocketing West Texas Land Prices Have Oilmen Uneasy

October 31, 2016/ 09:40

Washington. Texas—Wall Street investors have fallen in love with properties in the Permian Basin, and that is making some West Texas oil men nervous.

Even though a barrel of oil commands half what it did two years ago, the price being paid by companies for drillable acres in the prolific oil field has shot up to never-before-seen levels. In recent weeks, some have paid upward of $40,000 an acre for drilling leases—about eight times what similar properties fetched two years ago, when oil prices were close to $100 a barrel.

Companies such as  Pioneer Natural Resources Co. and Occidental Petroleum Corp. have said their land in the Permian Basin, where there are layers of oil-bearing rock stacked on top of each other, holds substantial oil reserves that can be tapped in tandem, making each acre more valuable than in a typical oil field.

As others pile into the Permian, veterans of the region’s oil fevers worry that the current lease prices will set off another boom that will be quickly followed by an inevitable bust. The region has experienced booms before, notably in the early 1980s and again in 2008 and 2014, all of which were followed by busts.

“I think that [pricing] is absolutely ridiculous,” said Kenny Freeman, the vice president of sales at Petrosmith Manufacturing LLC of Abilene, Texas.

His company, which makes oil storage tanks and equipment that separates oil, water and natural gas after it is pumped out of the ground, had to dismiss 260 employees—more than half its workforce—in the past couple of years as drilling activity slowed.

“We need steady growth. We have been out here for many years and we know how to do it,” he said. “If you jump back up and add 30 rigs in a month, it will get bad in a hurry.”

Mr. Freeman was one of about 55,000 people who attended the Permian Basin International Oil Show, a biennial gathering here where companies convene to sell everything from drilling rigs to safety gloves and to discuss the state of the industry.

After two years of anemic oil prices, the talk of the show—inside and surrounding the coliseum where the Odessa Jackalopes minor-league hockey team plays—was how much companies were paying for land.

Hours before the expo kicked off last week, SM Energy Co. paid $1.6 billion for West Texas acreage amassed by a private-equity-backed company. Denver-based SM paid an estimated $42,600 an acre, according to 1Derrick, an oil-industry information provider, reports The Wall Street Journal.

His company, which makes oil storage tanks and equipment that separates oil, water and natural gas after it is pumped out of the ground, had to dismiss 260 employees—more than half its workforce—in the past couple of years as drilling activity slowed.

“We need steady growth. We have been out here for many years and we know how to do it,” he said. “If you jump back up and add 30 rigs in a month, it will get bad in a hurry.”

Mr. Freeman was one of about 55,000 people who attended the Permian Basin International Oil Show, a biennial gathering here where companies convene to sell everything from drilling rigs to safety gloves and to discuss the state of the industry.

After two years of anemic oil prices, the talk of the show—inside and surrounding the coliseum where the Odessa Jackalopes minor-league hockey team plays—was how much companies were paying for land.

Hours before the expo kicked off last week, SM Energy Co. paid $1.6 billion for West Texas acreage amassed by a private-equity-backed company. Denver-based SM paid an estimated $42,600 an acre, according to 1Derrick, an oil-industry information provider.

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