Texas Shale Willing to Spend to Get Ahead

Texas Shale Willing to Spend to Get Ahead

The Texas energy sector is poised to revive drilling in the state for 2017. While big oil companies are planning to cut spending this year due to concerns the recent rebound in oil prices won’t last, shale-oil drillers are increasing their spending in an effort to increase production.[1]

Oil giants such as Exxon Mobil Corp., Chevron Corp., Royal Dutch Shell PLC, and BP PLC are cutting back spending due to worries members of the Organization of the Petroleum Exporting Countries (OPEC) will not follow through on agreed upon output cuts.[2] Another cause for concern: the possibility OPEC adheres to the cuts, but U.S. output from smaller firms replaces the barrels OPEC removes from the market, hindering an increase in oil prices.[3]

OPEC agreed in November to cut production; since then, oil prices have risen about 20%.[4] Overall, daily oil production has been reduced by about 1.8 million barrels from OPEC and non-OPEC producers such as Russia, the world’s largest oil producer.[5] OPEC Sec. Gen. Mohammed Barkindo has said inventories are what the group is targeting with the cuts, not U.S. shale producers.[6]

The amount of oil in storage rose to a record high of more than 1.2 billion barrels in 2016 in the Organization for Economic Cooperation and Development group of industrialized countries, which includes the United States.[7] Those barrels are not being emptied by oil traders yet, which is threatening OPEC’s power over markets.[8] The cartel has since moved quickly to force storage levels down to prevent U.S. producers from using the price recovery to spur output.[9] Saudi Arabia announced earlier this month it would cut production more than promised under the OPEC agreement, after the U.S. Energy Information Administration said domestic crude stockpiles rose more than expected in the first week of January, by 4.1 million barrels for a total of 483.1 million barrels.[10]

The Wall Street Journal reported recently that analysts have raised their oil-price forecasts for the first time in five months, predicting Brent crude, the international oil price benchmark, will average $56 a barrel this year, while West Texas Intermediate, the U.S. oil benchmark, is expected to average $55 a barrel.[11] Reuters reported the same day that Brent crude prices had fallen 5% since early January and West Texas Intermediate was down 5 cents from their previous settlement as rising U.S. drilling activity offsets the production cuts of OPEC.[12]

Chevron disclosed plans to cut its spending to approximately $20 billion this year, a decrease of 15 percent.[13] BP has said it expects to spend between $15 billion to $17 billion in 2017, which would be between a 30% to 40% drop from 2013 spending levels.[14] Meanwhile, Shell is planning to spend between $25 billion and $30 billion annually through 2020, and Exxon hasn’t disclosed spending plans for this year.[15]

Driving the cut in spending budgets are the demands of oil giants’ conservative investors, forcing companies to focus on profits and reducing debt to maintain share-price stability and stable dividend payments.[16] Responding to the companies’ spending plans, share prices of big oil firms are faring better than in previous years. Exxon is up 15%, Chevron is up 40% from this time last year, and Shell and BP are trading at levels similar to 2014, before the price of oil plunged.

Conversely, shale company investors are focused on production growth, allowing companies to return to U.S. oil fields.

Though oil prices plunged in late 2014, Texas avoided a recession, unlike most oil-producing states.[17] The Texas Alliance of Energy Producers recently released an index showing oil and gas activity rose in December 2016 for the first time in two years.[18] Mining and logging jobs have grown during the past three months, and the Federal Reserve Bank of Dallas is forecasting Texas will add 233,000 jobs this year; that’s 45,000 more than last year, and 78,000 more than in 2015.[19]

Several companies recently closed billion-dollar deals in the Permian Basin.[20] Daily oil production in the Permian has almost doubled since 2012.[21] Noble Energy, based in Houston, recently agreed to buy Clayton Williams Energy for $2.7 billion, a deal that includes over 2 billion barrels of oil in the Permian.[22] Exxon Mobil also agreed this month to buy oil and gas leases in the state for $6.6 billion, holdings estimated to have 3.4 billion barrels of oil.[23] According to Credit Suisse estimates, EOG Resources, Apache, and Marathon oil, all major players in the Permian, are expected to increase capital spending by more than 50 percent this year.[24]

Texas maintains a AAA rating from S&P, and oil production taxes account for approximately 4% of general revenues in the state’s budget.[25]

[1] Mitchell Schnurman, Texas energy sector gets ‘moment we’ve been waiting for’ after two tough years, Dallas Morning News (Jan. 27, 2017), http://www.dallasnews.com/business/energy/2017/01/27/two-tough-yearstexas-energy-sector-gets-moment-waiting.

[2] Sarah Kent & Bradley Olson, Big Oil Firms Look to Save, While Smaller Upstarts Want to Spend, Wall St. J. (Jan. 29, 2017), http://www.wsj.com/articles/big-oil-firms-look-to-save-while-smaller-upstarts-want-to-sepnd-1485691204.

[3] Id.

[4] Benoit Faucon, Sarah McFarlane & Ahmend Al Omran, OPEC Takes Aim at Its Biggest Problem: Oil Storage, Wall St. J. (Jan. 12, 2017), http://www.wsj.com/articles/opec­takes­aim­at­its­biggest­problem­oil­storage­1484240624.

[5] Id.

[6] Id.

[7] Id.

[8] Id.

[9] Id.

[10] Id.

[11] Georgi Kantchev, Analysts See Oil Prices Rising as OPEC Production Cut Bears Fruit, Wall St. J. (Jan. 30, 2017), https://www.wsj.com/articles/analysts-see-oil-prices-rising-as-opec-production-cut-bears-fruit-1485777910.

[12] Henning Gloystein, Oil prices down five percent in January as rising U.S. output offsets OPEC-led cuts, Reuters (Jan. 30, 2017), http://www.reuters.com/article/us-global-oil-idUSKBN15F04F.

[13] Kent, supra note 2.

[14] Id.

[15] Id.

[16] Id.

[17] Schnurman, supra note 1.

[18] Id.

[19] Id.

[20] Id.

[21] Id.

[22] Id.

[23] Id.

[24] Id.

[25] Id.