• 4 minutes Who Really Benefits From The "Iran Attacked Saudi Arabia" Narrative?
  • 7 minutes Trump Will Win In 2020
  • 12 minutes Ethanol, the Perfect Home Remedy for A Saudi Oil Fever
  • 15 minutes Experts review Saudi damage photos. Say Said is need to do a lot of explaining.
  • 36 mins Millennials: A boil on the butt of the work ethic
  • 9 hours Hong Kong protesters appeal to Trump for support.
  • 8 hours A little something for all you Offshore swabbies
  • 19 hours Europe: The Cracks Are Beginning To Show
  • 16 hours Ban Fracking? What in the World Are Democrats Thinking?
  • 21 hours Iran Vows Major War Even If US Conducts "Limited Strikes"
  • 3 hours When Trying To Be Objective About Ethanol, Don't Include Big Oil Lies To Balance The Argument
  • 3 hours LA Times: Vote Trump out in 2020 to Prevent Climate Apocalypse
  • 35 mins US and China are already in a full economic war and this battle for global hegemony is a little bit frightening
  • 6 hours Saudi State-of-Art Defense System looking the wrong way. MBS must fire Defense Minister. Oh, MBS is Defense Minister. Forget about it.
  • 6 hours Shale profitability
  • 6 hours Memorize date 05/15/2018 cause Huawei ban is the most important single event in world history after 9/11/2001.
  • 3 hours Pompeo: Aramco Attacks Are An "Act Of War" By Iran
  • 16 hours Let's shut down dissent like The Conversation in Australia
Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

More Info

Premium Content

The Permian Is A Double-Edged Sword For Oil Majors

The oil majors are scrambling to scale up their shale operations, and they are quickly becoming the most dominant producers in the shale sector, despite having arrived late to the party.

The early days of shale drilling was done by small and medium-size drillers. Over the last few years, the oil majors like ExxonMobil and Chevron are taking on a much greater role in U.S. shale, particularly in the Permian basin.

Chevron’s Permian production shot up to 377,000 bpd in the fourth quarter of 2018, up 172,000 bpd from a year earlier. The company’s production was up 70 percent on an annual basis.

Looking forward, Chevron expects to keep its spending mostly flat in the Permian while ramping up in other basins. “We've seen significant reductions in development costs in the Marcellus, in the Duvernay and in the Vaca Muerta, as we've shared the learnings and improvements that are emanating from the large-scale activity we have in the Permian, the economics on each of these are compelling,” Wirth said.

But even as Chevron boasted of achieving production growth in the Permian as well as transferring the lessons learned to other basins, there are still questions about the profitability of the company’s assets in West Texas.

“In the Permian, we remain focused on returns. We're not chasing our production target, nor are we altering our plans based on the price of the day,” Chevron’s CEO Michael Wirth told analysts on an earnings call.

Paul Sankey, an analyst at Mizuho Securities, pressed Chevron’s chief executive on an earnings call. “I guess you're strongly outperforming your volume targets, can you also talk about your returns there, because those concerns that you're perhaps not as leading edge as we might want you to be in terms of your Permian performance on a returns basis,” Sankey said. Related: BP CEO Dudley: U.S. Shale Is ‘A Market Without A Brain’

Chevron’s Michael Wirth was unfazed. “Our confidence in the Permian is higher today than it was the last time that I spoke to you,” he said. “When you're talking about returns, these -- we put out a data before on the returns that we're seeing and they're well up in the 35%-plus range as we've moved to longer laterals, a better basis of design and even in a modest price environment, we're seeing very, very strong returns. It's as good as -- good or better than anything else we could be doing.”

Chevron maintains that it will be cash flow positive in the Permian by 2020 and that the company would allocate much of additional cash flow to shareholder distributions. The company appears confident about the path that it is on in West Texas.

But the health of the industry is in the eye of the beholder, in many ways. In response to Chevron’s financial results, some market analysts were not as impressed. “THE REAL STORY IS THAT THE FRACKING SECTOR HAS BEEN, AND CONTINUES TO BE, A FINANCIAL BUST,” Kathy Hipple, Tom Sanzillo and Clark Williams-Derry wrote in a joint commentary for the Institute for Energy Economics and Financial Analysis (IEEFA) and the Sightline Institute. Related: Oil Prices Could Soar On Trade War Truce

The analysts said that the industry continues to utter the same refrain that it has been for a long time: “Wait ‘til next year.” They are referring to Chevron’s promise to be cash flow positive in the Permian by 2020. “The oil and gas giant is now admitting that its enormous bets on the Permian Basin will continue to bleed red ink for the rest of 2019. Investors will have to wait for yet another year — at least — until Chevron’s Permian assets start to pay off,” they wrote.

In a previous study, the trio of analysts found that a selection of 32 mid-sized U.S. E&Ps spent nearly $1 billion more on drilling and related capital expenditures during the third quarter of 2018 than they generated in sales, which was notable because market conditions were much more auspicious than at any point in previous years. “These results may come as a surprise to investors who incorrectly equate rising output with financial success,” they wrote. At the time, U.S. oil production was breaking records, oil prices were at their highest point in years and “[e]ven with those advantages, our sample of mid-size oil and gas producers continued to hemorrhage cash due to the high cost of drilling and the industry’s seemingly insatiable thirst for capital.”

Chevron is a late-comer to the Permian, so presumably they are in the early growth stages, spending on drilling so that they can scale up and eventually turn a profit. But, as the IEEFA and Sightline Institute analysts note, that has been the mantra from most shale companies for more than a decade. If Chevron manages to become cash flow positive, investors will likely forgive and forget. But that remains to be seen. In the meantime, Wall Street is beginning to lose some patience with shale drillers.

By Nick Cunningham of Oilprice.com

More Top Reads From Oilprice.com:




Download The Free Oilprice App Today

Back to homepage



Leave a comment
  • thor thor on March 01 2019 said:
    how are they going to be profitable in 2020 if by then the wells drilled so far will be largely depleted?

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News
Download on the App Store Get it on Google Play