Supermajor oil companies must invest $30 billion in the Permain

By Staff | June 18, 2018

The three supermajor oil and gas companies most active in the Permian Basin must invest $30 billion in the shale play through 2020 to achieve their growth targets, according to a new report from IHS Markit.

To meet production growth targets before the end of 2020, the business information provider’s report said investments by ExxonMobil, Royal Dutch Shell and Chevron “will catalyze cost inflation and will gradually force consolidation in the basin.”

“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 Sven del Pozzo, IHS Markit’s director of energy equity research and analysis.

Del Pozzo is author of the IHS Markit report entitled: “Company Play Analysis—Permian: Supermajors are a disruptive force, catalyzing cost inflation and forcing gradual consolidation.” His report estimates that the three companies will need to collectively make nearly $30 billion in new investments—the equivalent of adding three producers the size of Pioneer Resources to the Permian.

The report noted that while the level of investment is good news, it will also “naturally enhance execution risk and cause financial stress for smaller E&P (exploration and production) companies.”

As del Pozzo explained, “Many of these 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. 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.”

Since 2017, the Permian well performance of the three big supermajors has been catching up to that of the E&Ps, the IHS Markit report said. According to del Pozzo, Exxon Mobil recently drilled a few “monster” wells in southeast New Mexico.

“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,” he continued. “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.”