The Permian Is A Double-Edged Sword For Oil Majors

Lambert here: Wall Street “beginning to lose patience” with an industry that hasn’t turned a profit in ten years? But I thought quarterly results-driven blah blah blah… Curious.

By Nick Cunningham, is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. Originally published at

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.

Looking forward, Chevron expects to keep its spending mostly flat in the Permian while ramping up in other basins. “We’ve seen significant reductions in development costs in the Marcellus, in the Duvernay and in the Vaca Muerta, as we’ve shared the learnings and improvements that are emanating from the large-scale activity we have in the Permian, the economics on each of these are compelling,” Wirth said.

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.

Paul Sankey, an analyst at Mizuho Securities, pressed Chevron’s chief executive on an earnings call. “I guess you’re strongly outperforming your volume targets, can you also talk about your returns there, because those concerns that you’re perhaps not as leading edge as we might want you to be in terms of your Permian performance on a returns basis,” Sankey said. Related: BP CEO Dudley: U.S. Shale Is ‘A Market Without A Brain’

Chevron’s Michael Wirth was unfazed. “Our confidence in the Permian is higher today than it was the last time that I spoke to you,” he said. “When you’re talking about returns, these — we put out a data before on the returns that we’re seeing and they’re well up in the 35%-plus range as we’ve moved to longer laterals, a better basis of design and even in a modest price environment, we’re seeing very, very strong returns. It’s as good as — good or better than anything else we could be doing.”

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. Related: Oil Prices Could Soar On Trade War Truce

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.

In a previous study, the trio of analysts found that a selection of 32 mid-sized U.S. E&Ps spent nearly $1 billion more on drilling and related capital expenditures during the third quarter of 2018 than they generated in sales, which was notable because market conditions were much more auspicious than at any point in previous years. “These results may come as a surprise to investors who incorrectly equate rising output with financial success,” they wrote. At the time, U.S. oil production was breaking records, oil prices were at their highest point in years and “[e]ven with those advantages, our sample of mid-size oil and gas producers continued to hemorrhage cash due to the high cost of drilling and the industry’s seemingly insatiable thirst for capital.”

Chevron is a late-comer to the Permian, so presumably they are in the early growth stages, spending on drilling so that they can scale up and eventually turn a profit. But, as the IEEFA and Sightline Institute analysts note, that has been the mantra from most shale companies for more than a decade. If Chevron manages to become cash flow positive, investors will likely forgive and forget. But that remains to be seen. In the meantime, Wall Street is beginning to lose some patience with shale drillers.

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. notabanker

    For me, this is seems to be the biggest mistake Sanders / AOC / progressives are making with regards to the agenda. While it’s positive that MMT has entered mainstream debate, it’s taking up too much bandwidth. The bottom line is the allocation of resources by the private markets haven’t provided economic returns to anyone but billionares and C-level execs and they are destroying us.

    This debate is going to have to shift from the merits of deficit spending to what exactly we should be investing in. Whether it’s fossil fuels, health care, pharma, technology, big agri, the private markets have malinvested on losers.
    Fracking is the shining example. Those junk bonds need to go bust. Flaring and venting needs to be outlawed. No one is taking this on.

    I sat down with someone I know very well who has been a local democratic political activist for 20 years. I showed them how QE works, where the debt went, how the frackers were going broke, how NG pricing went negative while New Mexico is flaring enough NG to supply the entire state, free. They were absolutely blown away. I ended the conversation with ‘next time some smart ass says we can’t afford it, show them this’. The message works.

    1. Harry

      I think the shift from stimulus by supporting the value of bonds and existing equities, to stimulus by actually constructing something, would implicitly shift the allocation of resources. But you are right, it makes sense to actually talk about it. Isnt that part of what the Green New Deal is all about?

      On the fracking front, I thought everyone knew it was a Ponzi. A Ponzi which provided free call options on oil to Texans who only know how to drill? The reason why Wall Street is surprisingly patient is its a literal definition of a sunk cost. No point drawing attention to that ahem “potential” bad loan. So nothing for it now but to wait for a spike in Oil prices to push the Ponzi into the money. One sometimes wonders if thats what the war on Iran is meant to be about – putting those call options int the money.

      Anyway, much like Florida doesnt speak of Global Warming, but does spend on it, Wall Street doesnt put new money into fracking, but that doesnt making it good business to talk about what you have lost.

      I think $50 is where it does not make sense to actually drill any more. But it depends on the formation (the price at the formation hub) and whether the equipment has already been leased.

      1. Whiteylockmandoubled

        Said it before, will say it again. NC keeps publishing these stories like it’s some headscratcher. No mystery. The “losses” are a feature not a bug for the limited partners, especially non-profits, for whom the losses offset UBIT from other asset classes. Just time the fund exit right and you do fine.

        1. Amfortas the hippie

          like the mob owning a restaurant or a bar.

          the other “headscratcher”, for me, is that these are spent fields…Permian Peaked(w/ “conventional” oil) circa 1971.
          these serial fracking “booms” are a geopolitical weapon(vs. OPEC/Russia), a used car salesman yell(“New Saudi Arabia!!!”)…and, per your comment, a Harvesting of the last bits of corn left on the ground, before the field is burnt.(see: )

          when they can’t get anything out of the Permian, they’ll rediscover East Texas(peaked circa late 60’s*)…and we’ll be treated to a new round of hyperventilated cheerleading about energy independence(since the bulk is exported, i don’t really understand this,lol) and sky’s the limit nonsense.

          (* west texas, and the eagle ford down south, is largely uninhabited(a bunch of poor people, though)…so what pushback there’s been has been safely ignored.
          east texas, oth, is thickly populated. when the industry rediscovers oil there, there will be a hue and cry. mark my words)

    2. JohnH

      The Green New Deal emphasizes both investment in renewable energy and the jobs it would create. If the emphasis appears to be on MMT, I think it is because those covering the story want it that way. Granted, it can be difficult to clear the smoke that the media throws up, but I expect mitigation of climate change and the jobs it would create to be the main focus of the Sanders / AOC / progressives crowd.

    3. jonst

      Really? Is it really true that private markets haven’t provided economic returns to anyone but billionaires and C Level execs”. Because I’m sure as hell getting some good dividends from a lot of investments in my IRA. Are “fossil fuels, health care, pharma, technology, big agri” ALL been bad investments? Because I gotten good returns, and growth, in all the sectors. Is all the fracking going bust? Is everyone wrong in Texas et al. And your right.

      Look, I grant inequality hounds us. But it has forever, literally, everywhere, with the narrow exception of a period from roughly 1941-1973. I don’t know if that period was a historical anomaly, pumped up by the number of baby boomers who grew up in the period and believe, since it was, roughly, all they had seen in their early lives that this was going to be the norm, And now we’ve fallen back to the mean.

      None of this should be taken as an argument for embracing the status quo. It just seems to me there has been so much apocalyptic hyperbole in the MSM, Trump is Hitler, our democracy is going to end, the world is coming to an end with climate change, Trump is going to nuke N Korea, Trump is going to surrender to N Korea, Trump is setting up Concentration Camps in Texas and so on and so on and so on that if and when these things don’t pan out…we have made it easier for Americans to elect the bastard again. People seem unhinged and hysterical to me. Incapable, for admittedly complex reasons, to putting things in perspective and trying to improve the things that can be improved. Because a lot can but that is no reason to run around like a chicken with its head cut off.

      1. notabanker

        People are making tons of money, no doubt. I have family in Texas. They’re doing well. One of them made a pile of money migrating up here to Ohio to install the Nexus pipeline. We have acquaintances in pharmaceuticals knocking down half a million a year each. Stock market is at historic highs. Millions of retirees are probably gleeful for the stock market run up. Chesapeake Energy shot up 8.1% in one day yesterday. Bravo if it was in your portfolio.

        I knew one of the original GS traders in synthetic CDO’s. He made a fortune and got out before it all went to hell because he knew it would. He built some spectacular houses around the world. I met hundreds of Silicon Valley exec’s that made vast fortunes. Met people that were on their 3rd 100M+ start up. Sat across tables negotiating with C-Level execs from Fortune 50 tech companies. Worked on a daily basis with Investment Bankers that knew more about technology than most technology execs. They made great dough. Interviewed with the CIO of Bridgewater. 30’s, jeans, t-shirt, brilliant guy was worth a fortune.

        Before I die, I’ll write it all in a letter to my two kids telling them how great it used to be. Maybe I’ll apologize to them because all those really smart people who knew how to make money were right and I was wrong, so I didn’t do anything about it. And don’t worry because climate change isn’t going to destroy the world, just the humans. Sure we caused it, and we knew about it, but they were really good investments at the time. Good luck.

        We are issuing debt to an industry that can’t make money because no one needs to buy their product so they are burning it into the atmosphere because that is the cheapest way to get rid of it. We aren’t even using the fossil fuels, we’re just flat out pumping them into the atmosphere. But hey, the returns on oil are great. This is not hysterical, it’s the truth. It is exactly what is happening right now, today. It is a horribly irresponsible use of money and resources, I don’t care who is profiting off of it.

        1. Chauncey Gardiner

          Thanks for your comment, notabanker. Rudy Havenstein posted a cartoon on his twitter last week that I feel captures the essence. A man in rags is speaking to children around a campfire: “Yes. the planet got destroyed. But for a beautiful moment in time we created a lot of value for shareholders.”

          As Charles Dickens once said in his A Tale of Two Cities, “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity…”

  2. PlutoniumKun

    A particular issue for the fracking oil industry is that contrary to what you’d expect, low prices encourages even more production from existing wells. Because capital costs are largely up front and the marginal cost of increasing outputs from an existing well are very low, there is often an incentive for oil producers to maximise flows in order to improve cashflow. So the normal market dynamics don’t apply in the short to medium term, meaning there is a tendency to gluts. The only think that might save them is that OPEC is working hard to cut down on output to get oil consistently into the $70 a barrel area. Trump might also help if he starts a stupid war in Venezuela or Iran.

    1. Harry

      There is also a tendency to use low grade grit, and to accelerate the production curve, at the cost of reducing the total production. I guess it makes sense. Why leave anything in the ground for the creditors?

    2. Sanxi

      As a banker among other things, the average cost to frack a barrel of oil is $70- 80, thus there is always an incentive to produce as much oil no matter what the price of oil is on the market. OPEC is not doing anything to cut production. They can’t for a number of reasons, one they use quite a bit themselves to power their own societies and two they run large welfare states that get larger each year. As to the price of oil, anything above $70 a barrel the Western economies start to break down. Lastly, to date not one bank has made any money on fracking loans, nor will we. In the end we will be the proud owners of the last remaining supplies of oil in the world.

  3. The Rev Kev

    The fracking industry. Not to be confused with an ongoing pump-and-dump scheme. For some reason, when talking about fracking, I am reminded of when you are drinking down a thick shake from McDonalds and when you get to the bottom, you run your straw around the edges sucking up that last bit of the drink until you hear that slurping sound. Strange that.

  4. Bill Smith

    A year or two ago I was at a dinner party with several people involved in this. They made money as they had entered this market by buying up some of the smaller producers that had gone into bankruptcy due to cash flow problems for pennies on the dollar.

    The point being while the industry might not have made money in 10 years, there are places inside that industry that do make money.

    I’m not sure exactly how true this but there has been somewhat similar talk about the airline industry. If you go back and add up all the losses / bankruptcies against the profits from the start, how profitable has the airline industry been?

    1. jsn

      I expect an honest accounting would show both industries would be dead but for Govt subsidies.

      I wonder, for how many other industries/sectors this is true? Definitely the FIRE sector…

  5. Ric F

    I feel like I heard this song before. During my misspent youth in the 1970’s in Flint, MI, the running joke was, “Well, sure GM is losing money on every car they sell, but they will make up for it in volume.”

    What is beyond sad is that investors fall for this again and again and again….

  6. Gregorio

    I wonder how much US actions towards Iran and Venezuela have to do with the profitability of the oil sector? What could possibly be more effective in raising global petroleum prices than a war with Iran?

  7. Chauncey Gardiner

    Setting aside private monetary debt associated with shale oil development, w/b useful to know both the narrow primary EROEI associated directly with shale wells in specific fields; and the broader EROEI of shale oil nationally that includes the energy costs of related well components, infrastructure, transport, and refining; and the GHG emissions, social and environmental costs and risks together with the associated probabilities of positive or negative ratios for both shale oil and alternative energy sources.

  8. Overtheponder

    Retired Texas banker here.

    Ancient oil patch wisdom that is re-learned and forgotten again far too many times:

    If it don’t make cash flow it ain’t worth sh*t.

  9. Oregoncharles

    So EROI (Energy Return On Investment) has financial consequences. Nice to know.

  10. Harry

    For Oil Majors its a little different. You might even think it makes sense. So imagine you are BP. You can invest in a new deep water well, with the risk that a 1st world government gets angry at your total screwup and chooses to transfer all most of your net wealth position to the Gulf Coast. Or you could put money into Iraq with somewhat different risks. Or you could put money into shale. Shale will lose you money if Oil is below $60. But you can pretty much switch it off and wait. Your stated reserves go up. Your investment spend is lower showing higher revenues and lower costs. And if oil does spike you can switch it on.

    Whats not to like?

    1. Synapsid


      Oil majors with their own refineries can make money when the oil price is low as the feed for the refinery is inexpensive. The smaller companies don’t have that possibility.

      It’s still a race to nowhere for the shalies, though.

  11. Darius

    Amazon and Uber have never been profitable yet Wall Street pours money into them. Isn’t it about controlling huge sectors of the economy and stamping out competition?

  12. TG

    Love them or hate them, at least the oil majors do SOMETHING useful.

    How much easier to be a big bank and just have money funneled into your pockets without risk. Or a defense contractor, helping to wage endless pointless winless wars with cost-plus contracts and no accountability. Or to be Microsoft and just collect monopoly rents on office suite (basically perfected two decades ago) for the rest of time. Or borrow money from the public at near-zero percent interest, loan it to hapless students for wildly overpriced tuition, and have your six percent (or whatever) returns guaranteed by the public… ‘Risk Assessment’ is so 19th century. Or borrow money and pay yourself a big stock bonus, that’s more automatic profit. No worrying about safety, or the environment, or competitiveness, or technical problems…

    One wonders that any American-based companies bother to do anything real at all. Perhaps soon, none of them will.

  13. Luke


    “Men often take dumb risks by pounding drinks they should probably skip. It may have seemed like such a dumb stunt when former Democratic Colorado Gov. John Hickenlooper threw back a shot of fracking fluid — but in fact it was perfectly safe.

    Hickenlooper knows what so many liberal environmentalists deny: The cocktail of water and chemicals that gas companies inject into the ground as part of the fracking process isn’t “poisonous” at all.”

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