Shale consolidation becoming prevalent

From the Houston Chronicle

The great shale oil consolidation is underway, and it’s happening just in time for the new challenges ahead.

For the past decade, dozens of small, independent oil companies have perfected hydraulic fracturing and horizontal drilling to break oil out of Texas shale. They succeeded beyond their wildest dreams.

The U.S. pumped a record 11.35 million barrels a day in August, according to the Energy Information Administration. That is 2.1 million barrels more than last year, setting a record for the highest year-over-year increase.

The jump came along with oil prices strengthening to $75 a barrel for West Texas Intermediate. Seasoned oil executives know that when both prices and production rise, it’s time to cash out and sell to the big boys.

The flurry of deals started in January when oil prices began to turn. Exxon purchased 275,000 acres in the Permian Basin from Fort Worth’s Bass family for $6.6 billion.

BP paid $10.5 billion for BHP Billiton’s U.S. shale assets in July. The struggling Australian mining company is getting out of the shale game and gave BP, already the largest foreign player in the U.S., 83,000 acres in the Permian, 236,000 acres in the Eagle Ford and 193,000 acres in the Haynesville.

Midland-based Concho Resources paid $8 billion to buy RSP Permian in March. Concho Chairman and CEO Tim Leach said the purchase will create a “super” Permian Basin player with 640,000 acres.

In August, Diamondback Energy bought Energen in an $8.4 billion deal and Ajax Resources for $1.2 billion, taking two small Permian players out of the game. The deal gives Diamondback, one of the biggest Permian-focused companies with 390,000 acres.

Two more major deals came in last week. Chesapeake Energy said Tuesday it would acquire Houston’s WildHorse Resource Development for $3 billion in cash and stock, giving the early shale developer a substantial foothold in the Eagle Ford shale basin.

Canada-based Encana Corp. announced its purchase of Newfield Exploration Co. for $5.5 billion the following day. The deal expands Encana’s reach out of the Permian and into the Oklahoma and North Dakota shale areas.

Other major oil companies were already invested in the shale plays. Chevron has the most valuable portfolio and is expected to spend $54 billion to develop it.

This year alone has seen $43.2 billion in deals. But this is the kind of consolidation investors should expect as shale drilling matures. The small, scrappy companies willing to roll the dice on new technology have succeeded, and from this point forward, large players are needed to maximize efficiency to lower costs, boost production and make more significant capital investments.

Analysts at Wood Mackenzie, an energy data analysis firm, estimate companies can still squeeze out an additional $10 billion a year by optimizing shale operations. Larger companies can perfect the assembly-line approach to drilling and smooth out logistics across more acres.

Fewer operators will also make it easier to inch prices higher to increase capital expenditures. Oil companies slashed spending when oil prices dropped in 2014, and long-term forecasts foretell an oil shortage without more exploration and production.

Globally, oil companies will need to spend 20 percent more to meet demand, and not only in the shale plays, according to Wood Mackenzie.

“Four years of deep capital rationing have had a severe impact on resource renewal, especially in the conventional sector,” said Tom Ellacott, Wood Mackenzie’s senior vice president for corporate research. “Not enough new, high-quality projects are entering the funnel to replace those that have left.”

The industry needs to spend an additional $600 billion a year to meet future demand through the next decade, Wood Mackenzie calculated.

For now, though, executives are focused on generating good numbers for the next quarter and not worrying about next year, according to a survey by consulting firm Deloitte.

While oil executives are confident that shale will produce crude for decades to come, outside analysts worry this may be the Permian Basin’s last hoorah. Wood Mackenzie predicts shale investments will peak in 2023.

That’s the same year that electric vehicles will likely become cheaper than petroleum-powered cars. How quickly the world will adapt to electric-powered transportation raises fundamental questions about the future of the oil business, but that’s a subject for another column.

This year undoubtedly marks a critical tipping point for the shale oil industry. The wildcatters are cashing out, the majors are moving in and shale drilling is growing up.

Nevertheless, investors will do well to keep up the pressure on oil companies to maximize efficiency and produce profits, because the future is uncertain.


Legal Notice