Deal flow in the Permian Basin is being driven by stacked, oil-rich resource plays, according to Ward Polzin, managing director, head of A&D, for Tudor, Pickering, Holt & Co. Some 80% of transactions since 2010 in the age-old basin have targeted repeatable plays using modern unconventional drilling and completion techniques; only 20% trading hands were for conventional assets.

“Stacked oil is what makes the Permian unique in terms of deal value. You don’t find the multiple-pay components elsewhere that you do here,” he said. Polzin spoke to attendees at the Executive Oil Conference in Midland, Texas, in April.

In the Midland Basin, which accounts for 51% of Permian Basin deal flow in the past 18 months, the vertical Wolfberry play dominates both drilling and A&D activity. Here, Polzin values the assets at $50,000 per flowing barrel of oil, and $10,000 to $15,000 per acre in addition. “We know the type curve,” he explained.

Horizontal targets in the Midland Basin include the Wolfcamp and Cline shales, both in early stages of development. The going rate in the core of these plays average $5,000 to $6,000 per acre, although no deals with production have yet sold. The high point tops at $7,100 an acre paid by Veritas 321 Energy Partners LP in the most recent University of Texas Lease Sale.

Most new horizontal drilling efforts in the Permian are in the Delaware Basin, where operators are targeting Bone Spring, Avalon, Wolfcamp and Wolfbone. Deal values on the western side of the Permian trend about the same as its eastern counterpart—$4,000 to $6,000 per acre.

While all these plays are still in early development, Polzin said the variety of multiple stacked targets here cause a variance of opinions amongst buyers.

“Is this a vertical play in the Wolfbone, or a horizontal play in the Wolfcamp? Is my first target Bone Spring or Avalon? How many laterals are we going to have to land in each section? The industry has not aligned on one answer to these plays out there.”

Yet none of these stories have merit if not economic, he noted. At $90 to $100 oil, “all of these have greater than 30% returns, some higher than 100%. They’re all working, and that’s unique.”

Where are the conventional deals in the Permian? “Oil is $100 and making a lot of money—not too many people want to sell it. What might have been noncore in someone’s portfolio five years ago is pretty core now.”

And transaction values in the Permian are only going to go up as buyers become more confident with the type curves coming out of these new resource plays, he said. Where the Eagle Ford and Bakken shales have peaked at $15,000 to $18,000 per acre, and the Marcellus shale even falling below its highs, the Permian’s resource plays are still in early days.

“We haven’t had that many deals or wells to compare to other basins.” With such good economics coming out of these plays, “values have nowhere to go but up.”

Rigs up, gas left. For the first time since the peak in third-quarter 2009, U.S. onshore rig count once again topped the 2,000 mark. But with a twist this time—more than two-thirds of rigs running today are oil focused, versus 20% in 2009.

“Just in the last five months, gas rigs have dropped 29% while oil rigs are up 23%. You’re seeing this occur daily as gas rigs move over to oil rigs.”

And the Permian holds the lion’s share with a total 475 rigs, essentially all oil directed. That number is up from 75 rigs in 2009. “Effectively, one-third of all the oil rigs in the U.S. are in the Permian.”

Polzin noted also that the U.S. deal market is shifting. In 2010, the gas-to-oil deal ratio was 50-50. Today, more than two-thirds of deals are oil, and most are happening in the Bakken and Eagle Ford shales and in the Permian. “I’ve no doubt that when we total up 2012 it will be 80-20 oil to gas,” he said.

Motivating metrics. Oil metrics, not surprisingly, are on the rise. Proved reserves are being valued at about $20,000 per barrel, with production valued at approximately $100,000 per flowing barrel on average. Some plays command a premium: Wolfberry production, for instance, is now valued at $150,000 per flowing barrel and higher.

The Permian is the best place for proved developed producing dealmaking. “PDP goes for less than PV10—more like PV8,” he said.

Most companies pursuing liquids today are exploration stories, he said, but Comstock Resources is the first example of a gassy company aiming to get oily quick. Comstock, with a market value of about $1 billion, paid $332 million for 21 million barrels of oil proved in the Permian Delaware Basin, along with upside.

“That’s a big bet for a company their size. Exploration might take several years to turn lease acquisitions into bank account dollars. We’re going to see more companies doing deals like that in second-half 2012.”

Buyers are consistently using $90 oil in their acquisition price decks, he revealed.

On the other hand, conventional dry gas deals by count are “pretty dang quiet,” some three to four per quarter. “You can count them on one hand. There’s not a lot going on in the gas market today.”

Pointing to the Atlas Resource Partner’s acquisition of Carrizo Oil & Gas Barnett shale dry gas assets in March, metrics in that transaction fell to $5,000 per flowing thousand cubic feet (Mcf) and $1.10 per proved Mcf. Compare that with comparable metrics of $7,000 to $10,000 per flowing Mcf and $2 per proved Mcf just six months ago.

“I would call that selling just to get rid of it,” he said. “Now you’ve seen that break. Anybody selling today just has the need for cash to put it somewhere else.”

But dry gas deal supply will remain anemic, he believes. While contrarian dry gas buyers are coming to the forefront, they want cheap deals. “I tell them good luck. I don’t think you’re going to find too many sellers.”

Price decks utilized for valuing dry gas deals now typically fall in the $4.50 to $5 range, but with less consistency due to a three-year downward trend in the future’s strip price.