By Bradley Olson and Rebecca Elliott
Smaller, nimbler companies pioneered the U.S. shale boom. But as
American production scales up, those frackers are losing ground to
Big Oil.
Giant companies such as Chevron Corp. and Exxon Mobil Corp. are
increasing shale production faster and with fewer complications
than their smaller rivals. Their superior size and deeper pockets
give them an edge in planning large drilling projects and locking
in the pipeline and labor deals needed to ensure profitability.
Exxon doubled its shale rigs across the U.S. from the end of
last year through September and became the most active driller in
the country, according to industry tracker RigData. Chevron's
output in the Permian Basin of Texas and New Mexico rose 80% for
the year ended in September, eclipsing some of the small producers
that spent years building up their fracking positions.
"You need scale once you're in development mode to be able to
succeed at the margins that you have," said Jeff Shellebarger,
Chevron's president of North America exploration and
production.
Size also helps larger companies weather volatility in the oil
markets, where U.S. crude prices have plunged more than 20% in the
past month to about $56 a barrel. The bigger companies kept
spending in check as oil rallied earlier in the year, making them
less vulnerable to the recent selloff. As a result, Exxon shares
have fallen only 4% in the past 30 days, compared with the 17%
decline in the index of smaller producers, according to
FactSet.
Smaller exploration and production companies recently reported
their best third-quarter performance in five years, thanks to
higher oil prices earlier in the year. Of 27 independent producers,
23 were profitable, including EOG Resources Inc. and Continental
Resources Inc. The companies' collective net income totaled about
$6 billion, compared with $2 billion in losses a year ago.
Bigger producers also reported strong quarters. Global oil
companies including Exxon, Chevron, BP PLC, Royal Dutch Shell PLC,
Occidental Petroleum Corp. and ConocoPhillips made almost $5
billion in the quarter from their North American drilling units, up
from a $373 million loss. While those results include areas such as
the Gulf of Mexico, most companies said shale production was a
significant factor.
The bigger companies have benefited in shale drilling from being
able to ramp up production with fewer obstacles from Texas to North
Dakota. Smaller operators, meanwhile, faced challenges such as
pipeline bottlenecks that forced some to scale back drilling plans
or move rigs away from areas where the constraints were most
severe.
"Scale is so important in shale," said Uday Turaga, chief
executive of ADI Analytics, an energy consulting firm. "You can
drive down costs from suppliers, secure pipeline access more
quickly and get better contracts."
Independent exploration and production companies also hedged
much of their oil production to protect themselves from the
downside risk of falling oil prices. That was crucial protection
for many smaller, less well-financed shale companies, but it
prevented them from fully capitalizing on the upswing in oil
prices.
About three-fourths of the smaller companies have spent more
cash than they have generated from drilling so far in 2018, a
metric many investors track to monitor the financial sustainability
of the industry. Collectively, they have outspent their cash intake
by about $5 billion, according to FactSet data.
While many big oil companies were slow to fracking, bigger
companies have tended to benefit as technology matures and drillers
shift from exploration to large-scale production.
That trend is most apparent in the Permian Basin. Large
companies including Exxon, Chevron, BP, Shell and Occidental this
year are set to produce an average of about 600,000 barrels a day
of crude in the region, up 54% from last year. By 2021, their
output there will exceed 1.1 million barrels a day, or about 20% of
the area's total shale-related output, according to consulting firm
Rystad Energy.
Chevron's Permian Basin production soared to more than 330,000
barrels of oil and gas a day during the third quarter, an 80%
increase from a year earlier. By comparison, it took Parsley Energy
Inc., a smaller operator, four years to boost its production to
100,000 barrels from 10,000 barrels.
Larger, integrated companies have managed to avoid many
challenges that have plagued independent producers, whose U.S.
production increased by an average of 17% in the past year,
according to a review of company disclosures.
Hedging is projected to cost top drillers more than $5 billion
this year, according to a Wood Mackenzie analysis of the larger
companies that hedge their oil and gas production.
The recent drop in oil prices is likely to mitigate hedging
losses. However, on average, the companies' hedging programs don't
begin to generate gains unless crude prices fall below $56 a
barrel, Wood Mackenzie analyst Andrew McConn said.
Oil giants generally avoid those kinds of futures contracts.
Because their market size dwarfs small drillers, they face limited
pressure from lenders to hedge, and their hedging losses have been
muted.
Pipeline access is another area where bigger companies fared
better. As U.S. oil production soared above 11 million barrels a
day, growth exceeded existing pipelines, forcing smaller companies
to sell their oil at a discount. Crude sold in the Permian Basin
was discounted by an average of $14 a barrel during the third
quarter, according to S&P Global Platts. That differential has
since contracted to about $5.
Larger oil companies have historically secured enough pipeline
capacity from any oil field in which they are boosting production
to avoid having to sell crude at such discounts. Many own or build
pipelines outright.
That helped Occidental, one of the largest Permian Basin
producers, realize nearly $800 million in profit from its pipeline
and trading business during the third quarter, more than three
times the income from its U.S. drilling business. Vicki Hollub, the
company's chief executive, said the company's integrated business
model proved advantageous.
Write to Bradley Olson at Bradley.Olson@wsj.com and Rebecca
Elliott at rebecca.elliott@wsj.com
(END) Dow Jones Newswires
November 15, 2018 08:14 ET (13:14 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
Chevron (NYSE:CVX)
Historical Stock Chart
From Aug 2024 to Sep 2024
Chevron (NYSE:CVX)
Historical Stock Chart
From Sep 2023 to Sep 2024