Why Big Oil is sold on fracking

Shale has transformed America into an energy superpower, which pumps more crude than Saudi Arabia.

There is one group with deep pockets that is eyeing shale — the oil majors. Picture: AFP

Shale has transformed America into an energy superpower, which pumps more crude than Saudi Arabia.

Investors are nonplussed. They clamour to buy bonds from Saudi Aramco. At the same time shale producers surveyed by the Dallas Federal Reserve gripe about access to debt.

Oil prices climbed in recent months but shares of many frackers failed to keep pace because of doubts over their ability to realise both growth and a steady income.

There is one group with deep pockets that is eyeing shale: the oil majors. Last year mining heavyweight BHP sold its American shale assets to BP, Britain’s oil giant, for $US10.5 billion ($14.7bn). In March ExxonMobil said it planned to produce one million barrels of oil equivalent a day in Texas’s Permian basin by 2024. And on April 12 Chevron announced it would pay $US33bn in cash and stock to buy Anadarko, a smaller energy company with a big shale business (and assume its $US15bn of debt).

That hands Chevron a big liquefied natural gas project in Mozambique. Anadarko’s holdings in the Gulf of Mexico will make Chevron the second-biggest producer there.

But the main prize is its vast acreage in the Permian’s rich Delaware basin.

Chevron has held land in the Permian for decades. It had drilled wells in the conventional direction: down. Its properties began gaining value a decade ago after wildcatters had success drilling sideways, and blasted shale with sand and water to force it to give up oil and gas.

Anadarko’s contiguous plots will let Chevron drill further sideways and ease transport of the masses of sand and water needed for each well.

Frackers suffered after 2014, when Saudi Arabia declined to cut production and oil prices plunged. Today, even with higher oil prices, they look constrained.

Their median return on equity last year was less than half that of Wall Street’s S&P 500 stockmarket index, according to investment bank Morgan Stanley. More investors are demanding they spend only as much as they earn — a novel concept. To many asset managers, shale looks passé.

Chevron’s share price is down by 4 per cent since the announcement; Anadarko’s is up by 36 per cent, below the 39 per cent premium Chevron’s bid represents on its pre-deal value.

A group of climate-conscious shareholders has chastised Chevron for choosing shale over renewables.

For big oil companies, which are facing their own pressures, shale nevertheless looks alluring.

They lost the title of the world’s most valuable corporations to tech firms.

In an era of oil abundance, they are working not just to find new crude, as was their habit, but to produce it as cheaply as possible. The majors appreciate shale’s quick drilling times, predictable cashflows and favourable regulation.

“It becomes your throttle,” says Bob Brackett of Bernstein, a research firm. “When times are good, you dial it up.”

The question, then, is not whether Big Oil will bet on shale, but whether it will double down.

The Delaware basin certainly looks ripe for consolidation.

Last year the largest seven producers accounted for about half of output.

Others each produced 4 per cent or less. Wall Street may have cooled on the Permian.

Big Oil certainly has not.

The Economist