It has become evident by now that supermajors Chevron (CVX), ExxonMobil (XOM) and Shell (RDS) are serious about long-term aggressive development of unconventional reservoirs in the Permian Basin.
All three players stick firmly to their strategy of fast tracking development of the unconventional resource base in the Permian, giving the region priority ahead of other parts of their portfolios. Chevron’s recent decision to allocate $3.6 billion of capital to Permian development in 2019 emphasizes this commitment.
We examined at the data in our ShaleWellCube and UCube databases and found five ways to illustrate just how far these three majors have advanced on the learning curve for unconventionals.
Figure 1 shows gross operated two-stream production from unconventional wells in the Permian by each of the three companies, whereas their contribution to the total unconventional output from the Permian and year-over-year growth is shown in the right-hand axis.
It is interesting to note that back in 2016 – a year that started with the WTI price falling below $30 per barrel – the majors behaved in a counter-cyclical way, contributing more than 15% of moderate basin-wide YoY production growth. This contribution looked high in the context of their 7-8% contribution to total output from the Permian. The rest of the basin started growing dramatically from the second half of 2017 and the majors initially followed the market before accelerating upwards in the first nine months of 2019. Both XOM and CVX doubled their unconventional output between December 2017 and September 2018, whereas Shell achieved 80% growth during the first half of 2018. As a result, these three operators already account for about 11% of total unconventional production in the basin.
Looking back at the majors’ early years of involvement in the shale patch, their performance often reflected a relatively gradual learning curve and displayed a significant share of inferior well results. This situation had changed dramatically by 2017-2018.
Each dot on the lines in Figure 2 shows average two-stream six-month recovery per well for all operators that turned-in-line five or more wells in 2017-2018 across four core sub-basins. CVX exhibits outstanding well performance on both sides of the state border in the Delaware basin, while scoring among the top 30% in Midland North. XOM makes it to the top quartile in Delaware NM and gassy Midland South, whereas XOM and RDS deliver better results than half of the operators in Midland North and Delaware Texas respectively. As things stand today, the competitiveness of well results achieved by the majors in the Permian is no longer an area of concern, and in fact their efficient cost structure and economies of scale allow them to look even better from a well NPV and breakeven price perspective.
It should be added that such exceptional well results are achieved without considerable high-grading of drilling locations, which is seen for many other Permian operators. As shown in Figure 3, all three operators drilled only 40-45% of their wells in Tier 1 acreage – defined by us as being among the top 25% of drilling locations in the Permian from a well economics perspective.
The majors have also undertaken a lot of restructuring within their supply chain, service contract structure and hydrocarbon marketing. In some cases, this was related to self-sourcing of crude & gas disposition services. Yet the most striking trend is observed on their exposure to various pressure pumpers in the Permian over a period of several years.
Figure 4 shows the market shares of various service providers for the collective fracking activities of CVX, XOM and RDS in the Permian. Back in 2013-2014, 80% of Permian frac jobs for this trio were serviced by the four largest providers (primarily by Halliburton). Remarkably, by 2018 the share of the Big Four providers (now the Big Three given Schlumberger’s acquisition of Weatherford’s pressure pumping arm) declined to a paltry 13%! Essentially, the lost market share was completely taken by Keane Group (FRAC) and ProFrac Services. We observe similar interesting trends in the driller market, with the majors largely working with smaller rig companies in the Permian as opposed to H&P, Nabors and Patterson.
When it comes to long-term projections for the majors in the Permian, we see the potential for 300+% production growth between 2018 and 2030. Interestingly, such growth requires an increase of only 45% in annual D&C spending levels compared to what we saw in 2018. The three majors are poised this to collectively spend about $6.5 billion on unconventional drilling and completion activities in the Permian. Our production forecast is achievable with an average D&C spend of $9.4 billion per year over the next decade. Half of this increase in spending is likely to happen already next year with free cash flow moving to the positive zone (i.e. majors are already able to achieve self-financed growth from the Permian). With an assumption of $60 WTI oil prices in the long-term, free cash flow will increase to $15.6 billion per year by 2030.