Shale Oil Production Offers Positive Talking Point For Chevron
Summary
- Oil production from the Permian Basin is forecast to be 10% higher than earlier estimates.
- Chevron, and a very few other Majors, have fared better than most E&P firms in the industry's current malaise.
- Timed in a conservative manner, technological advances and applying best practices have allowed Chevron to leapfrog other peers.
Super majors like Chevron (NYSE:CVX) and ExxonMobil (XOM) have weathered the oil and gas industry beatdown better than most. One bright spot for Chevron is their unconventional production. Actually, Chevron's Permian shale oil strategy is exceeding their plans announced since their Analyst Day this spring. Chevron still projects 3.1 million barrels/day production by 2017. Unconventional production increased in the Permian and Argentina's Vaca Muerta by 40,000 barrels per day.
Since their last Analyst Day, Chevron has increased its outlook for Permian production. (See "3 Shale Basins" article.) Recent comments by the Chevron North America E&P President Shellebarger relayed their value proposition in the Permian:
We are employing a disciplined, value-focused development strategy in the Permian. We are not in a drill or drop situation, and our low lease holding costs allow us to focus on the highest return projects in a paced matter while leveraging industry learnings. Our efforts on lowering cost while simultaneously increasing production rates and ultimate recoveries are helping to improve overall well and program economics.
Chevron expects that 2014 Permian unconventional production will be more than 10% higher than initially forecast, thus their long-term unconventional production growth continues to become more steep:
Source: CVX presentation 3Q2014
In comparing this chart to the earlier projections, the production from the Central Basin Platform is excluded. This is some of their legacy "Permian Base" production included in the Analyst Day presentation (chart in earlier cited article and below). From comparisons between charts, base production comprising about 10 rigs grows to around 50 rigs, with about 40 rigs in the Midland and Delaware Basins of the Permian. (The Permian Basin is made up of Midland, the Central Basin Platform and Delaware.) Currently they have 18 active rigs in the Midland Basin and 11 in the Delaware, for approximately 370 wells and 180 wells in 2014, respectively. In the Midland Basin, production increased by 15,000 barrels of oil equivalent per day or 40% during the first nine months of the year, Chevron noted in their call.
Interestingly, after 2016, production in the Delaware Basin exceeds Midland Basin production, according to the earlier forecast. (From Analyst Day)
From their earnings call, Chevron highlighted the Salado Draw horizontal program in Lea County, New Mexico. They note that: "While there are multiple benches in this area, we are targeting the Upper Avalon with its initial 16 well development. With success we envision more than 60 well locations at Salado Draw."
Delaware wells drilled in the third quarter are reported with 30-day IPs, averaging just over 1000 boe per day. The increased production expectations in the Permian Basin result from drilling efficiencies, innovating in drilling and completion techniques and design, and being in development mode in certain areas.
Other shale plays offer additional production potential for Chevron: the Duvernay with approximately 330,000 net acres in the liquids-rich window and the Utica and Marcellus with more than 500,000 mmcfed gross production (year-to-date results to 3rd Q).
With respect to current oil prices, Chevron offers that "the Permian does rank at the high end of our investment portfolio and it should be good at the current price environment." And technology cannot be underestimated in being a driver of these capabilities. A comment by the North American E&P head was telling: "Certainly, three years ago, we wouldn't have seen this kind of potential. Three years from now, it could be even better."
This statement relates to the discovery process happening as they explore and appraise outer edges of the Basin, but highlights the way in which technology is helping leverage production capabilities. The production forecast increases are largely from the movement to horizontal wells, longer lateral lengths, and more [fractured] stages.
Chevron notes that about one and a half years ago, they were relatively new to the Basin in terms of unconventional action. Like Occidental Petroleum, the conservative approach of taking their time has allowed for better-than-expected production, given the advanced industry knowledge in hand. "Super-independent" Occidental (OXY) declined 18% from its peak in late June to November 4th, less than others in this class of producer. From a peak price of $134.85 to $115.37 (11/4), a 14% decline, Chevron has started to slowly recover. The stock traded at $116 by midday of November 5th.
This article was written by
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