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Permian Needs $30B from ExxonMobil, Chevron and Shell to Hit 2020 Targets, Says IHS Markit

The Permian Basin’s active supermajors ExxonMobil Corp., Chevron Corp. and Royal Dutch Shell plc will need to invest nearly $30 billion over the next two years to hit their growth targets, according to IHS Markit.

“If truly committed to the Permian Basin, the traditionally return-focused supermajors will have to grow accustomed to a rising cost-basis in order to build their core, operated-acreage positions that currently do not suffice to meet medium- to long-term growth plans,” said the firm’s Sven del Pozzo, director of energy equity research and analysis.

The massive investment would catalyze cost inflation and gradually force consolidation, he said.

The total suggested by IHS Markit effectively would translate into “adding three companies the size of Pioneer Resources Corp. to the Permian to achieve their production growth targets by year-end 2020.”

If the supermajors were to build their nest eggs in the Permian, it would “naturally enhance execution risk” but it would cause financial stress for smaller exploration and production (E&P) companies.

Many smaller Permian independents issued “strong growth projections after going on equity-financed acquisition binges in 2016 and early 2017, facilitated by share prices that reflected high expectations for growth,” del Pozzo said. “The supermajors will further stress the Permian service sector, and as costs escalate, the increased execution risk may be too great for these smaller companies to overcome, possibly forcing them into mergers or sales.”

This theme played out in the recent $9.5 billion acquisition of RSP Permian Inc. by Concho Resources Inc., the largest U.S. upstream merger and acquisition deal since 2012.

RSP had been one of the smallest pure-play Permian independents before making itself a “much bigger, and much more appetizing, target for a big company,” analysts noted.

Concho was willing to pay a premium for RSP, whose assets were nearly all Permian core, and therefore deserved a scarcity premium, del Pozzo said.

“Notwithstanding what we estimate was a premium price paid for RSP’s assets, Concho’s move might have been strategically prescient,” he said. “Prior to the deal, industry service-cost inflation was already apparent, as was the benefit of scale.”

Since 2017, the Permian well performance of the three big supermajors has been catching up to that of the E&Ps, according to IHS Markit. For example, ExxonMobil has recently drilled a few monster wells in southeast New Mexico, del Pozzo said.

ExxonMobil, now one of the biggest leaseholders in the Permian, in January said it planned to triple Permian production to more than 600,000 boe/d by 2025, with tight oil output from the Delaware and Midland sub-basins alone increasing five-fold. It also has earmarked $50 billion in U.S. investments over the next five years, with $20 billion for Gulf Coast petrochemical and related expansions, some of which lead back to Permian output.

Chevron, a legacy Permian player, plans to end this year with 20 company operated rigs. Last year, it added more than 60,000 acres to its legacy acreage through various swaps, joint ventures, farmouts and sales.

Shell has been more quiet about its Permian progress, but it has been building out its midstream business. It also is rumored to be bidding to buy the U.S. onshore portfolio of BHP Billiton Ltd., which includes a bundle of properties in the Permian, among other regions.

“What may be most exciting for service companies active in the Permian Basin is the concept that the supermajors could source funds from their non-U.S. cash flow,” del Pozzo said. “All the supermajors have a relatively low Permian cost-basis, which was provided by cheap acquisitions of assets prior to the boom in Permian unconventional development.

“If the return-focused supermajors are to remain committed to the Permian, they must accept the reality of a rapid escalation of their cost-basis that will accompany their medium-to long-term growth plans.”

Del Pozzo authored “Company Play Analysis -- Permian: Supermajors are a disruptive force, catalyzing cost inflation and forcing gradual consolidation.”

IHS Markit earlier this month said Permian oil, natural gas and liquids production is forecast to more than double by 2023. Permian crude oil production is forecast to reach 5.4 million b/d, more than current production from any single member of the Organization of the Petroleum Exporting Countries except for Saudi Arabia. Natural gas output is forecast to jump 116% to 15 Bcf/d, while natural gas liquids should climb 105% to 1.7 million b/d.

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