Big Oil’s Permian work pays off
Companies record higher-than-expected profits thanks to oil flow from the basin
Big Oil is starting to see its billions worth of investments in the Permian Basin pay off as production soared and the fourth quarter of 2018 brought higher-than-expected profits.
Chevron Corp., one of the biggest producers in the region, as well as Exxon Mobil and Royal Dutch Shell, all reported higher profits thanks to the increased flow of oil out of West Texas.
These oil majors were mocked for nearly missing the shale revolution when they lost out to faster-moving indepen-
dents a few years ago, but in the years since, they’ve purchased hundreds of thousands of acres in West Texas, investing billions in land, rigs and drilling programs.
Chevron pumped 2.93 million barrels per day in 2018, the highest ever annual production in the company’s history, and Exxon’s production crested 4 million barrels a day for the first time in almost two years.
In the Permian Basin alone, Chevron saw its annual production jump 71 percent last year, hitting 310,000 million barrels per a day annually.
Shell, while significantly behind Chevron in terms of Permian production, still saw its production hit 145,000 barrels of oil equivalent per a day in the region, a 200 percent increase compared to January 2017, the Anglo-Dutch major said. As for Exxon, its Permian production soared 90 percent from the same time last year in the fourth quarter.
“The growth they’ve been able to achieve in terms of their Permian output is pretty spectacular,” said Lysle Brinker, director of equity and energy research IHS Markit. “They still might not be as good as executing in unconventional plays (as independent companies), but they've gotten a lot better,” he said, noting well completions, drilling and efficiency.
With deep pockets to develop technologies and snatch up additional acreage, plus strong relationships with service companies, majors will see the Permian become in an even bigger part of their portfolios, Brinker said.
“We think there’s going to be more consolidating in the Permian and the big guys could be bigger players,” Brinker said.
Majors also can benefit from integration of Permian output into their refining and downstream portfolios. Recent announcements speak to that trend: Chevron purchased a Pasadena refinery to process lighter crude; Exxon Mobil has plans to increase output at its Beaumont refinery by 65 percent amid a $20 billion plan to grow its manufacturing on the Gulf Coast; and Shell recently started up an expanded petrochemicals complex in Louisiana.
With U.S. oil production 23 years ahead of schedule , the majors are retrofitting Gulf Coast refineries to better process the lighter grade crude of the Permian, instead of the heavier crudes of Canada and Mexico, and expanding petrochemical operations to take advantage of relatively cheap natural gas production in West Texas.
Exxon CEO Darren Woods said on the company’s fourth quarter earnings call that investments in Texas refineries are really "a transportation play" to take advantage of Permian crude.
"We believe our approach will deliver the lower cost supply and give us a significant advantage," he told investors in the fourth quarter earnings call.
The integration of its manufacturing and midstream businesses in North America helped to partially offset lower refining margins across the company. Overall refining earnings climbed 73 percent the fourth quarter, reaching $2.7 billion from $1.56 billion the same time last year.
The Irving oil major said Friday that fourth quarter net income slipped to $6 billion, down from $8.3 billion the same time last year. But strong production in the Permian Basin and healthy refining earnings helped bump up its annual net income to $20.8 billion compared to $19.7 billion the year earlier, a 5.5 percent increase.
Woods signaled plans for Exxon to boost its capital spending and asset sales next year. Exxon plans to spend $30 billion on capital projects this year, a 16 percent increase from 2018.
Chevron said Friday that it earned $3.7 billion in the fourth quarter, up from $3.1 billion during the same period in 2017, and beat analyst expectations. Its fullyear profits leaped more than 60 percent, to $14.8 billion, from $9.1 billion in 2017.
Chevron added 1.46 billion barrels of oil reserves in 2018, with the largest additions in the Permian Basin and LNG projects in Australia.
Chevron CEO Michael Wirth said he’s pleased with the company’s position in West Texas, particularly with regards to the company’s land and oil reserves. Chevron claims over 2 million acres in West Texas — it transacted over 150,000 acres of that between 2017 and 2018 — and the company has an estimated 11. 2 billion barrels of oil-equivalent reserves in the region. Wirth said he expects their oil reserves to continue to increase in the Permian.
Chevron expects to spend 3.6 billion in capital and exploratory expenditures in the region this year.
Shell, while not as big of a player as Exxon or Chevron, is on the hunt for more Permian Basin acreage. Shell is said to be eyeing a purchase of Endeavor Energy, which controls drilling rights on more than 300,000 acres of mostly undeveloped land in the Permian Basin in Texas and New Mexico, according to media reports.
Shell saw full-year profits jumped 36 percent to $21.4 billion in 2018. Stronger performance in the fourth quarter was driven by higher oil and gas prices, year-on-year, as well as a stronger contribution from liquefied natural gas (LNG) trading, the oil major said.
ConocoPhillips, while under-represented in the Permian, also beat expectations this quarter. The company plans to ramp up U.S. shale production this year. CEO Ryan Lance said on the fourth quarter earnings call that he sees a 25 percent increase in U.S. shale growth for ConocoPhillips this year driven by improvements in technology.
Bloomberg Intelligence energy analysts Fernando Valle and Jonathan Mardini wrote in a note that they believe ConocoPhillips, a $75 billion company that they call the “poster child” of financial discipline, will look to expand activities in the Permian this year.