There have been some signs the shale boom that re-energized America’s domestic energy industry a few years back, might be entering a maturing phase of its development. A phase where weaker players would hit a debt wall or be bought out at discounted value. A phase where, companies with cash who might have felt shale plays were too frothy at present levels, and had stayed on the sidelines waiting for the “froth” to dissipate. Biding their time. Now you can now almost hear the knives on the whetstone.
Beginning in 2019 these signs began to take shape in the massive retrenchment of the service industry that powered shale growth. Companies like Halliburton, (HAL) and Schlumberger, (SLB) threw in the towel and began to take charges against earnings, and layoff hundreds of staff.
This trend took on a real and tangible face when in a recent filing Chevron (CVX) said it would write down and put on the auction block its Marcellus shale assets. Assets it acquired from Atlas Energy in 2011 for $3.2 bn.
In the third quarter, 2019 conference call where this news was released to analysts, Michael Wirth, Chairman and CEO of Chevron commented-
“Mr. Wirth said Chevron must be selective about its investments moving forward, focusing on oil-rich regions like the Permian Basin in West Texas and New Mexico.” - WSJ
According to CVX, not all shale is created equal. Let’s make a note of that! My job as an oil industry expert is to dig a little deeper and see if we can determine just what drove this decision.
The Marcellus vs. The Permian
Why is Chevron abandoning the Marcellus for the Permian? Let's take a look at the isopach maps for both. In the graphic for the Marcellus, noted as Figure 2, you can see it is a relatively thin structure over most of its extent. And thins progressively the farther west it goes. The EIA comments thusly about production in the Marcellus:
Well, that just makes sense! But, as you look at the map of the Marcellus, one thing that strikes you is... those areas are concentrated in just a few areas on the eastern edge of the play, that some call the "Sweet Spots.” As you will see in the acreage map obtained from Chevron, they are generally quite a bit west of these sweet spots in about 50 percent of the acreage shown.
By comparison, the Permian play that is drawing Chevron's attention as it exits the Marcellus is thousands of feet in thickness across a broad swath of the Permian, as the EIA map below reveals.
Superficially, it seems to make sense. Cash out of a play that's gas-prone if you prefer oil. One that at best is a few hundreds of feet in vertical pay and go to one with thousands of vertical feet of pay across multiple horizons.
Too bad for CVX's shareholders they didn't figure that out before plunking down a few billion for acreage in the Marcellus.
Take some Maalox Chevron....you've got gas!
If you take a look at the acreage map below, you can see Chevron's current Marcellus footprint. As noted above they are well out of position to the eastern sweet spots in about half the play.
Source: Chevron's Post Atlas Energy Marcellus shale footprint. Note that Chevron's acreage is about half and half. Half in the sweet spot where formation thickness is in the 150-300' range, and half in the 25-50' thickness range.
The next thing we learn from the map showing oil to gas ratios is, it's really gassy. Well that’s no surprise really as the Marcellus is the reigning champ for gas as the table from the EIA’s Drilling Productivity Report reveals.
The problem and of course the root cause of Chevron’s dissatisfaction is that gas prices are in the tank due to over production domestically. There is no immediate cure on the horizon for that problem.
Thermal maturity refers to the alteration of the rock from burial depth. The heat generated from deeper burial causes the kerogen (the precursor to oil and gas) to transform into the useful forms we drill to obtain. The EIA report again has pertinent information as to what drove Chevron's decision to walk away from the Marcellus. Related: The Complete Guide To Cementing
Thermal maturity values (based on vitrinite reflectance, Ro measurements of core samples) in the Marcellus Shale generally increase in a southeastern direction, as shown in Figure 6, ranging from 0.5 percent Ro to more than 3.5 percent across the Appalachian basin. Recent Marcellus Shale drilling activity and results suggest that the most substantial hydrocarbon production takes place roughly southeastward of the 0.6 percent Ro maturity contour in the western parts of West Virginia, eastern Ohio, Pennsylvania, and southern New York. At thermal maturity values of greater than 3.5 percent Ro, the hydrocarbon production potential from the Marcellus Shale may become problematic based on the limited drilling results released to date. - EIA
Another problem CVX may have found is that a bunch of its southwestern acreage appears to be in the "thermally over-mature" area. What this will all boil down to is that the acreage will not be productive.
How about pressure?
Pressure is generally regarded as a good thing in oilfield operations, particularly when it comes to producing oil. Naturally pressured or over-pressured formations produce more oil and gas than those that are under-pressured. Pressure helps the well to overcome the effects of gravity and forces hydrocarbons up the well bore to the surface. Much cheaper than alternatives.
The EIA report, from which I drew much of the information I present here, comments about the Marcellus pressure regime.
The Marcellus exhibits several different pressure regimes across the Appalachian basin. Generally, the Marcellus is under-pressured to the southwest and normal-pressured to potentially over-pressured to the northeast, with a transitional area in between. Likely, the highest ultimate recoveries will be from the normal to over-pressured areas. The presence of these distinct pressure regimes and variations in lithology requires different approaches to well stimulation and completion (Zagorski et al., 2012). - EIA
Nearly all of Chevron's acreage is in the western section of Pennsylvania, with about half in the southwest section. The least pressured acreage in the Marcellus.
What has been happening with gas prices since CVX did this deal?
You could pretty much ski down this slope, absent the big "mogul" in early 2018, when it got cold for a week.
What the chart above tells is that operators are laying down rigs in the Marcellus in droves. Why? Because gas prices are so low, they can't make any money.
Or, they may be like poor old CVX and just have some bad rock they need to unload to the next "greater fool."
CVX got "city-slickered," in its deal with Atlas. Its position in the Marcellus consists of:
- Gas-prone reservoirs at a time when gas prices are very low.
- Low pressure regimes that add to the costs of production.
- Poor thickness of reservoir rock.
- Thermal maturities that yield mostly gas vis a vis oil, or is not productive at all.
The Atlas folks have to be chuckling a bit as they head out to the Country Club. They pulled the ultimate "lipstick on a pig," play with CVX, who fat with $100 bbl oil money opened up its checkbook to catch a wave only to find it fell flat.
It's time to high grade its drilling portfolio and shift resources to where the return will be better. And that's just what CVX is telling us it is going to do, focusing on the Permian.
CVX's write-down of its Marcellus assets surely won't be the last in this play. There is just too much gas right now.
One of the problems with lower tiers of rock is that there are just less oil and gas contained in the volume of rock as opposed to Tier I acreage. This in part accounts for the sharp drop-off in production a few months after they are brought on line.
What’s next for CVX? It missed out on the Anadarko opportunity earlier this year. When the CEO says “we going to focus on the Permian,” is he talking up the possibility spending some of ~$10 bn in cash CVX has in its coffers? We wouldn’t be surprised.
Chevron will open Monday, the 23rd trading near recent highs. Knowing this charge will hit Q-4 earnings, the stock price will likely fall back toward the $110’s. It has been remarkably resilient in that area bouncing off it twice this year. CVX pays a sweet dividend of $4.76 per share, yielding just under 4 percent currently. By comparison peers Shell and BP are paying in the 6.5 percent range, so pure yield seekers might want to look at them.
Bottom-line. CVX made a misstep in the Marcellus and now must pay for it. None-the-less, it is an extraordinarily well managed company and we think at the sub-$110 level it belongs in every energy portfolio.
By David Messler for Oilprice.com
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