March 1, 2019 Read More →

Major questions linger over profitability of oil, gas fracking in Permian basin

OilPrice.com:

The oil majors are scrambling to scale up their shale operations, and they are quickly becoming the most dominant producers in the shale sector, despite having arrived late to the party.

The early days of shale drilling was done by small and medium-size drillers. Over the last few years, the oil majors like ExxonMobil and Chevron are taking on a much greater role in U.S. shale, particularly in the Permian basin. Chevron’s Permian production shot up to 377,000 bpd in the fourth quarter of 2018, up 172,000 bpd from a year earlier. The company’s production was up 70 percent on an annual basis.

But even as Chevron boasted of achieving production growth in the Permian as well as transferring the lessons learned to other basins, there are still questions about the profitability of the company’s assets in West Texas. “In the Permian, we remain focused on returns. We’re not chasing our production target, nor are we altering our plans based on the price of the day,” Chevron’s CEO Michael Wirth told analysts on an earnings call.

Chevron maintains that it will be cash flow positive in the Permian by 2020 and that the company would allocate much of additional cash flow to shareholder distributions. The company appears confident about the path that it is on in West Texas.

But the health of the industry is in the eye of the beholder, in many ways. In response to Chevron’s financial results, some market analysts were not as impressed. “The Real Story is that the Fracking Sector has been and Continues to be a Financial Bust,” Kathy Hipple, Tom Sanzillo and Clark Williams-Derry wrote in a joint commentary for the Institute for Energy Economics and Financial Analysis (IEEFA) and the Sightline Institute.

The analysts said that the industry continues to utter the same refrain that it has been for a long time: “Wait ‘til next year.” They are referring to Chevron’s promise to be cash flow positive in the Permian by 2020. “The oil and gas giant is now admitting that its enormous bets on the Permian Basin will continue to bleed red ink for the rest of 2019. Investors will have to wait for yet another year — at least — until Chevron’s Permian assets start to pay off,” they wrote.

More: The Permian is a double-edged sword for oil majors

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