If supermajors such as Exxon Mobil Corp. (NYSE: XOM), Royal Dutch Shell Plc (NYSE: RDS.A) and Chevron Corp. (NYSE: CVX) want to hit Permian production targets, they will together need to shell out up to nearly $30 billion of investments in the basin through 2020.
This is according to IHS Markit, which released a report June 18 indicating the supermajors’ need for larger acreage positions. The analysis comes as players in the Permian—the top oil-producing region in the U.S.—drill laterals that have surpassed the 10,000-ft mark with more stage lengths and added clusters.
“If truly committed to the Permian Basin, the traditionally return-focused supermajors will have to grow accustomed to a rising cost-basis in order to build their core, operated-acreage positions that currently do not suffice to meet medium- to long-term growth plans,” Sven del Pozzo, director of energy equity research and analysis at IHS Markit, said in a news release. “IHS Markit estimates that the supermajors will need to collectively invest nearly $30 billion in new investments—effectively adding three companies the size of Pioneer Resources to the Permian, to achieve their production growth targets by year-end 2020.”
The investment ramp-up could bring about cost inflation, which could challenge smaller E&Ps, and eventually make way for consolidation in the basin, according to IHS. So another wave of land transaction could be on the horizon.
Supermajors are already making moves in the basin.
Exxon Mobil, for example, announced earlier this year it aims to triple its total daily production in the Permian to more than 600,000 barrels of oil equivalent within about seven years as it works to further lower drilling costs and capitalize on technology gains.
The company, which has been testing 3-mile (15,000-ft) lateral wells in the Delaware Basin, more than doubled its Permian position last year with the $6 billion acquisition of Bass family companies. The deal added about 5.4 billion boe of resources and 250,000 acres to Exxon Mobil’s roughly 1.5 million-acre Permian portfolio.
Chevron, which has about 2.2 million net acres in the Permian, is also planning to grow production in the basin by between 30% and 40% annually through 2020. The company guided in March 2% to 3% annual growth from its base plus shale and tight business through 2022 at $9 billion to $10 billion of annual capital spend, according to Chevron CFO Pat Yarrington.
“We also continue creating value through land transactions. We executed nine deals, swapping approximately 25,000 acres in the first quarter, and we have several others under negotiation. As you know, these swaps enable high value longer laterals,” Yarrington said on the company’s first-quarter earnings call in late April.
Shell is relatively new to the Permian, having entered the basin in 2012 with a joint venture with shale expert Anadarko Petroleum Corp. (NYSE: APC). However, the company has said it plans to more than triple its production from liquid-rich shale plays—including the Permian—from about 100,000 boe/d to more than 300,000 boe/d by 2020.
Smaller E&Ps went on “equity-financed acquisition binges in 2016 and early 2017,” IHS said. However, “the supermajors’ growth plans will naturally enhance execution risk and cause financial stress for smaller E&P companies.”
“The supermajors will further stress the Permian service sector, and as costs escalate, the increased execution risk may be too great for these smaller companies to overcome, possibly forcing them into mergers or sales,” del Pozzo said.
He used Concho Resources Inc.’s $9.5 billion merger with RSP Permian Inc. (NYSE: RSPP) as an example.
RSP, once a small pure-play independent, made itself a “much more appetizing target for a big company” after amassing acreage. Concho (NYSE: CXO) will expand its acreage position in the Permian to more than 640,000 net acres when it completes the acquisition of RSP’s roughly 92,000 net acres.
“Notwithstanding what we estimate was a premium price paid for RSP’s assets, Concho’s move might have been strategically prescient,” del Pozzo said. “Prior to the deal, industry service-cost inflation was already apparent, as was the benefit of scale.”
Still, more big deals are likely forthcoming as BHP Billiton Ltd. (NYSE: BHP) works to unload its U.S. shale assets. The company has said the exit process is progressing as planned with bids expected by June. The transactions could be announced in first-half 2019.
Velda Addison can be reached at email@example.com.
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