In the last issue I provided an overview of the Permian Basin in southwestern Texas and southeastern New Mexico. One of the country’s oldest oil production regions, the Permian has experienced a recent renaissance sparked by horizontal drilling and hydraulic fracturing.

In contrast to some of the other key oil basins, portions of the Permian contain stacked production layers thousands of feet deep. That’s given some companies a multi-year backlog of drilling inventory on a very small footprint as they tap this oil-rich stack.

As previously noted, Occidental Petroleum (NYSE: OXY) is the most prolific producer of crude oil in the Permian. Through the first eight months of 2015, OXY subsidiaries accounted for about 14% of the basin’s oil production. In fact, large, diversified oil and gas producers like Oxy, Apache (NYSE: APA), EOG Resources (NYSE: EOG) and ConocoPhillips (NYSE: COP) are all among the region’s leading producers.

But investors looking for concentrated Permian Basin plays also have plenty of choices. Here are 10 that are either pure-play Permian producers, or that have a large fraction of their production in the area, sorted in order of descending enterprise value:

• EV = Enterprise value in billions as of Nov. 11
• EBITDA = Earnings before interest, tax, depreciation and amortization for the trailing 12 months (TTM), in billions
• Debt/EBITDA = Net debt at the end of Q3 divided by TTM EBITDA
• FCF = Levered free cash flow in Q3 in millions
• Res = Proved reserves in million barrels of oil equivalent (BOE) at year-end 2014
• SM = Standardized Measure, also sometimes called “standard measure,” “net future cash flow” or “future net cash flow,” in billions of dollars as of Dec. 31
• Gas = percentage of reserves classified as natural gas

These 10 producers on average have an enterprise value of $5.5 billion, an EV/EBITDA of 9.1, a debt/EBITDA of 2.2, and have 234 million barrels of proved reserves. With the exception of Cimarex (NYSE: XEC), all have more liquids reserves than gas reserves. This group is on the whole more richly valued than the Bakken producers we examined last month.

The largest company on the list, Concho Resources (NYSE: CXO), is a pure Permian play with core operating areas spanning 1.1 million gross acres within three different areas of the Permian Basin. Concho is currently running 13 drilling rigs in the Permian, and in Q3 it produced ~149,300 BOE/day (65% oil) — a year-over-year increase of 32%. Concho has been one of the fastest-growing producers in the region, and has the largest reserves of the group. It’s a bit more expensive by some metrics than the group average, but the company’s history of rapid growth justifies a bit of a premium. It still has some work to do to plug a cash flow deficit, but as oil prices recover Concho should do very well for many years to come.

Fully half of the companies on the list generated positive FCF in Q3, though note that these calculations typically exclude drilling costs, which are capitalized, and can also be swayed by asset sales. Another Permian pure play, Approach Resources (NYSE: AREX), generated the second most FCF of any company on the list in Q3 despite an enterprise value of just $600 million, but its high level of debt relative to EBITDA is reason for concern. Its stock also has a lot of short interest at 22.5% of float, the second-highest level of the companies on the list behind Clayton Williams Energy’s (NYSE: CWEI) 31.5% short interest.  

The one company that really stands out to me in the group is Energen (NYSE: EGN). If that name sounds familiar, it may be because it also turned up on another one screen I wrote about this summer (see “Delta Force,” Aug. 17). Energen was highlighted because it made one of the strongest moves toward positive FCF in Q2 of all the oil and gas companies.

If you don’t know much about Energen, join the club. I had to do a little digging on this one, as it isn’t a household name. Energen started out as an Alabama utility, but over time its exploration subsidiary accumulated oil and gas properties. Finally in 2014 Energen sold its natural gas utility business, Alabama Gas Corporation (Alagasco), to Laclede Group (NYSE: LG) to focus entirely on oil and gas production.

At the end of 2014, Energen had proved reserves of 373 million barrels of oil equivalent, with 281 million barrels located in the Permian Basin. The rest is in the San Juan Basin in northwestern New Mexico.

Energen has allocated $810 million of its $1.1 billion 2015 capital budget to the Midland Basin, while another $135 million is allocated to the Delaware Basin. Thus, 86% of the company’s capital budget for 2015 is slated for the Permian Basin. This year the company plans to drill 98 stacked development wells on multi‐well pads and 20 appraisal wells in the Wolfcamp Shale and Spraberry Formation.

Over the past five years, Energen has grown production at a compound annual growth rate of 23.5%, but lower oil prices will limit this year’s growth to an estimated 19%:

Source: Energen investor presentation

Energen has more attractive financial metrics than the other companies on the list. It is cheaper according to its EV/EBITDA, EV/Reserves, and EV/Standardized Measure, and has the lowest debt ratio.

Energen certainly hasn’t been immune from the challenges that have dogged the oil industry over the past year, but it hasn’t been hit as hard as most E&P companies during the downturn. Over the past year Energen shares have declined 20%, while the Energy Select Sector SPDR ETF (XLE) is down 25% and many comparable drillers much more than that.

Looking beyond Energen, most of the other focused Permian producers have one or more valuation flags. Diamondback Energy (NASDAQ: FANG), for example, has a rich valuation according to most metrics, but that’s partially because its share price has actually risen 12.4% over the past year. I would be wary on this one in any case, as the last six-month period saw a net drop of 34% in shares held by insiders — perhaps an indication that they also feel the shares are richly valued.

There are more than 1,500 oil and gas companies operating in the Permian Basin. According to the Railroad Commission of Texas database, between January and August of this year 1,194 companies reported oil production in the Permian. While most of these outfits are closely held and the bulk of the production is controlled by large-cap giants, investors seeking concentrated exposure to this fabulous oil-producing area still have plenty of options.  

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