Waha summer-22 forward basis hits fresh lows as Permian production climbs

Forward basis prices at the West Texas Waha hub have faced steady downward pressure in recent months as the outlook for gas production in the Permian Basin turns increasingly bullish.

On March 4, calendar-month basis prices for June, July and August 2022 settled at an average 67 cents discount to the benchmark Henry Hub. Over the past six months, the summer strip price has lost about 35 cents, with even steeper basis price declines for the individual July and August contracts, S&P Global Commodity Insights' most recently published forwards data shows.

Downward pressure at Waha has accompanied a steady build in drilling activity in the Permian and a corresponding rise in gas production there since late-summer 2021.

Beginning in September, rig deployments to the Permian saw a noticeable uptick after appearing to level off at around 250 to 260 last summer. In the roughly six months since, the number of drilling rigs has surged to an estimated 320 as of the week ended March 2, data published by Enverus shows.

Other indicators of drilling activity in the Permian are equally bullish.

In January, producers there drilled an estimated 320 wells during the month, marking a pandemic-era high unseen since April 2020. In the six-month period ending in January, the number of monthly wells drilled averaged over 400, also a pandemic-era high not seen since first-quarter 2020, data from the US Energy Information Administration shows.

Production

Over the past eight weeks or so, Permian Basin gas production has surged, despite a series of crippling freeze-offs in West Texas, which have briefly leveled output on several occasions this winter.

Year to date, Permian gas production has averaged nearly 13.8 Bcf/d – briefly climbing to a record-high 14.3 Bcf/d late last month, S&P Global Commodity Insights data shows.

Production forecasts show Permian output continuing to gain ground this year, potentially surpassing 15 Bcf/d by late second quarter and reaching 16 Bcf/d by mid-2023.

With outright cash and forwards prices in the Permian Basin currently trading in the low- to mid-$4 area, producers have good reason to continue growing output there. As of February, half-cycle, post-tax internal rates of return in the Permian's Delaware Basin are now estimated at over 60%. In the Midland Basin, IRRs are estimated at around 55% with both sub-basins far exceeding the 25% threshold required for incentivized drilling and completion activity.