Shale drillers are starting to show some caution when it comes to their pace of drilling, but some of the oil majors are still increasing their efforts in the shale patch.
Chevron announced a 2018 capital spending program on Wednesday, which detailed spending cuts for the fifth consecutive year. One of the big reasons why Chevron slashed spending yet again is because of the completion of some massive, high-profile LNG export projects in Australia. But the oil major is also trying to chart a careful course amid uncertainty about oil prices.
But the oil major’s caution does not extend to the shale patch, where it is ratcheting up spending and ambition. “Our 2018 budget is down for the fourth consecutive year, reflecting project completions, improved efficiencies, and investment high-grading,” Chevron Chairman and CEO John Watson said in a statement. “We’re fully funding our advantaged Permian Basin position and dedicating approximately three quarters of our spend to projects that are expected to realize cash flow within two years.”
Those projects that realize cash flow within two years include U.S. shale. “With production currently exceeding guidance in the Permian, our 2018 plan should deliver both strong production growth and solid free cash flow, at prices comparable to what we’ve seen this year,” Watson added.
For Chevron, spending on U.S. shale now makes up more than a quarter of its $15.8 billion spending plan for next year. Another quarter is earmarked for spending in Kazakhstan.
But the oil major has declined, at least for now, to work on expansions of its gargantuan LNG export terminals in Australia—the Gorgon LNG and Wheatstone LNG projects. The idea had always been to expand those export terminals in phases, but with both now online—at a cost of nearly $50 billion to Chevron alone—the oil major has shelved any ideas of expansion. Instead, Chevron’s chief executive says, it will dedicate spending to short-cycle (i.e. shale) projects.
Taken together—a fifth year of spending cuts, while increasing spending on U.S. shale—Chevron is remaking itself into a serious shale producer. In 2018, Chevron will spend less than half of what it did in 2013 ($42 billion vs. just $19 billion), but with shale accounting for a growing slice of the pie. Rather than being mostly a developer of massive LNG and complex offshore drilling projects, Chevron is increasingly focusing on shale drilling. It’s a sea change that is hard to overstate.
The bullishness with which Chevron is approaching its shale unit comes at a time when the rest of the shale industry is under pressure to become more conservative. Years of aggressive debt-fueled drilling is starting to receive a course correction, thanks mostly to Wall Street and other big financial institutions fed up with the lack of profitability. Since 2007, energy companies have spent $280 billion more than they generated in revenue from shale drilling, according to the Wall Street Journal, citing data from Evercore ISI. Read that again.
The WSJ notes that the rock-bottom breakeven prices that shale drillers often tout to their investors typically exclude the cost of land, tax, exploration and other overhead. It cites Pioneer Natural Resources, which advertised its wildly low breakeven cost at some of its best Permian wells at just $2.25 per barrel, putting it on par with Saudi Arabia. But the WSJ pointed out that it is a highly misleading figure—Pioneer reported a loss of $556 million last year.
Meanwhile, at $50 per barrel, Wood Mackenzie estimates that the shale industry won’t post positive cash flow as a group until 2020. Related: Analysts Raise 2018 Oil Price Forecasts After OPEC Deal
Wall Street has finally caught on to these shenanigans, and major shareholders that control a sizable stake in some of the largest shale companies have worked together to pressure companies to scale back drilling in an effort to force them to focus on profits.
And they are actually making some headway with some high-profile strategy shifts seemingly in the works. Anadarko Petroleum announced share buyback in September after facing pressure from shareholders not to spend the cash on drilling. Devon Energy, the WSJ notes, has started to suggest that in the future it will take a more cautious approach to drilling and instead cycle cash back to investors in the form of dividends, share buybacks and debt reduction. “The industry was not nearly as efficient with its capital as it should have been,” Devon Energy’s David Hager said, according to the WSJ, “and I include Devon in that.”
There are two parallel tracks in the shale patch these days, with the medium to large-sized mainstays of the Texas drilling frenzy starting to rein it in, while the largest companies—the oil majors—are scaling up shale investment.
By Nick Cunningham of Oilprice.com
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