Late last week, Chevron announced its decision to takeover Anadarko Petroleum for $33 billion, a deal that could mark a watershed moment for the Permian basin and the U.S. shale industry as a whole.
The deal is widely seen as potentially the beginning of a massive round of consolidation in the shale industry. Already, the Permian basin has rapidly shifted in favor of the largest oil companies, with ExxonMobil, BP and Chevron betting their futures on West Texas and New Mexico. Exxon expects to produce 1 million barrels per day (mb/d) from the Permian by 2024, while Chevron had announced plans to produce 900,000 bpd by the same date.
The acquisition of Anadarko grows Chevron’s position in the Permian, while also adding offshore and LNG projects to the oil major’s portfolio. Chevron’s total production will jump almost to parity with Shell and ExxonMobil, rising to 3.6 mb/d after incorporating Anadarko. “We have always considered Anadarko as having the best positioned acreage in the sweetest spot of the Permian Delaware basin,” said Per Magnus Nysveen, head of research at consultant Rystad Energy. “Combining these shale assets with Chevron’s strong legacy position in the same area, we will now see Chevron emerging as the clear leader among all Permian players, both in terms of production growth and as a cost leader.”
In fact, while Chevron’s prior goal was to produce 900,000 bpd in the Permian within five years, it may now be able to achieve 1.6 mb/d after taking over Anadarko, according to Rystad, pushing it far ahead of Exxon.
Even as the majors scale up operations in the Permian, small- and medium-sized shale drillers have run into trouble, weighed down by an inability to turn a profit, pressure from shareholders, and more recently, the onset of stiff competition from the majors. Meanwhile, shale wells have run into production problems, with well interference, depletion, and a worsening gas-to-oil ratio hitting the bottom line. Even very large oil companies, such as Anadarko, are not immune.
If smaller companies can’t do the job, then perhaps many of them will fold and turn over the keys to the majors. The largest oil companies, such as Exxon and Chevron, have certain advantages that their smaller peers do not: they can spread out costs, operate at very large scales, and make investments with long time horizons. “Companies are starting to take a much longer view and develop these assets like a megaproject with a complex supply chain and significant spending in concentrated areas,” Noah Barrett, an energy analyst at Janus Henderson Investors, told the Wall Street Journal. “That amount of capital and logistical intensity will play well into the strengths of larger companies.”
Analysts say that Chevron’s acquisition of Anadarko could spark more M&A activity. “If you have large acreage positions like Pioneer and Concho, or lesser but more contiguous positions like Parsley Energy, and you’re a pure-play Permian producer, there’s no doubt that you are on the radar screen for these majors,” said Rob Thummel, portfolio manager at Tortoise Capital Advisors, according to Reuters. Reuters notes that other shale companies saw their share prices jump after the Chevron-Anadarko announcement, a sign that investors see the odds of acquisition rising. Pioneer Natural Resources, Concho Resources and Parsley Energy rose on the news. So did large oil companies with offshore positions, such as Hess and Noble Energy.
“Chevron’s deal for Anadarko escalates the race with Exxon Mobil for the Permian,” saidFernando Valle and Jonathan Mardini, analysts with Bloomberg Intelligence.
The deal marks the end of an era of sorts in the Permian. The days of hardscrabble mom-and-pop shale drillers arguably ended years ago, but the Chevron-Anadarko deal portends the end of the drilling frenzy for medium and even large oil companies. In a few short years, the Permian could be defined, if not exclusively, then perhaps predominantly, by the oil majors. The majors were late to the game, but they are set to ultimately dominate the largest shale basin on the planet.