By Bradley Olson
MIDLAND, Texas -- For Bruce Niemeyer, the Chevron Corp.
executive overseeing the company's $15 billion expansion here, one
question looms above all: Will we make money?
Big oil companies including Chevron, Exxon Mobil Corp. and Royal
Dutch Shell PLC are piling into the Permian Basin, the oil-rich
region straddling Texas and New Mexico that is the epicenter of the
second wave of U.S. shale drilling.
Chevron and others say they will soon achieve something that has
proven surprisingly elusive for their smaller peers: turning a
profit. The shale-drilling renaissance rocked global markets and
helped send crude prices into a prolonged slump. What it didn't do
was bring in much cash. Since 2011, the largest 30 independent U.S.
shale producers spent an average of nearly $1.33 for every $1 they
made drilling wells, according to a Wall Street Journal
analysis.
In the past two years, those 30 have lost $130 billion. More
than 120 companies have gone bankrupt, and many of those that
survived have done so with cash infusions from Wall Street, which
rewarded the drillers for their fast growth.
That model won't work for Chevron, Exxon and other companies who
pay shareholders generous dividends and need to bring in more cash
than they spend over time. To transform an important -- yet
money-losing -- technology into a source of profit, executives like
Mr. Niemeyer, the head of Chevron's midcontinent business, are
turning to their strengths.
Those include massive scale, deep pockets that have given them
time to learn from the successes and failures of others and an
ability to bring techniques used all over the world into West
Texas. They are joining the race to push crude production here to 4
million barrels a day within a decade, rivaling the output of
Iraq.
"The early stages favored the smaller companies, which could
test technology and try different things," said Anish Kapadia, an
analyst at Tudor Pickering Holt & Co., an energy investment
bank in Houston. "As they move into development mode, those with a
low cost of capital will have an advantage. This is the domain" of
large oil companies, he added.
The big companies face considerable skepticism from investors
who don't see how they can meet growth targets and generate excess
cash by exploiting shale fields. In recent years, Exxon, Chevron
and Shell have lagged behind top operators in the Permian basin by
a wide margin, with the big companies' individual wells producing
about half as much oil and gas in some cases, analysts say.
Executives at the biggest companies counter that these results
reflect, in part, a focus on drilling practices that bolster output
over the life of the well, rather than maximize short-term
flows.
"Big oil companies are basically lethargic, slow-moving giants,"
said David Arrington, a Midland-based entrepreneur who has drilled
wells in Texas for decades.
But last year, the big companies showed signs of narrowing the
gap, embracing techniques pioneered by smaller companies such as
drilling longer wells horizontally and using more sand to prop open
rock layers and let oil flow. Within a decade, Chevron estimates it
may produce as much as 700,000 barrels a day in the Permian, an
amount that would exceed the total current output in the U.K.'s
portion of the North Sea. Last year, Chevron's output in the
Permian averaged 175,000 barrels a day.
Chevron hasn't disclosed how much it will boost spending in the
area over the next 10 years, but analysts say it is likely to
exceed $15 billion.
"Nobody remembers who was winning the Indianapolis 500 after the
first 100 miles," says Mr. Niemeyer, 55 years old. "How you start
is interesting, but it's far more important how you finish."
Chevron is widely acknowledged as having the most valuable
Permian position among giant oil companies, with access to land
roughly double the size of Yosemite National Park. The land -- some
of which the company has held since 1920 -- may hold as much as 18
billion barrels of oil and gas, according to Tudor Pickering.
Exxon in January doubled its potential reserves in the region in
a deal worth up to $6.6 billion. From next year through 2020, about
half the $50 billion or more the company plans to spend in its
production business will go to the Permian, North Dakota and other
areas that can pay off in a short period.
Beginning in the 1920s, the Permian was once a land of abundant
gushers. But in the past two decades, many companies pulled out
because they believed its resources had largely been exhausted.
Chevron didn't.
In 2010 and 2011, a handful of small producers saw surprisingly
promising results when they tested horizontal drilling and other
techniques. It was then that Chevron began to entertain the notion
that it could be sitting on an immense prize.
Initially, the company moved slowly to develop its position,
wanting to maximize a key advantage over others: Chevron either
owns outright or controls the mineral rights on about 85% of its
1.5 million acres in West Texas and New Mexico. That allows Chevron
the luxury of developing the reserves in a way it finds most cost
effective, rather than in the mad rush typified by companies that
have to drill quickly or lose their lease.
A few years ago, Chevron began working with top operators in the
region, even allowing some of them to drill on its land. By
observing close-up the work of companies like Pioneer Natural
Resources Inc., Chevron was able to learn without costly
experimentation of its own.
Chevron has brought its production costs in the Permian Basin
down 30% since 2015 to below $20 a barrel. It says its operations
will generate free cash flow by 2020, far faster than typical big
oil projects.
"The market may be underestimating the ability of these
companies to change or adapt," said John Dowd, portfolio manager of
the Fidelity Select Energy Fund, which holds about $2 billion in
energy assets.
Write to Bradley Olson at Bradley.Olson@wsj.com
(END) Dow Jones Newswires
June 16, 2017 05:44 ET (09:44 GMT)
Copyright (c) 2017 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