Pump the Permian: Exxon's Quick-Fire Attempt to Stop the Drop

(Bloomberg) -- Texas dirt is emerging as Exxon Mobil Corp.’s best bet to arrest production declines that are threatening its position as the world’s most valuable listed oil company.

Exxon could become the most active driller in the Texas and New Mexico basin by year’s end, with a plan for at least 30 operating rigs. Now, Concho Resources Inc. is the most active driller with 26 rigs, if its planned $8 billion acquisition of RSP Permian Inc. is included, according to RS Energy Group.

Chief Executive Officer Darren Woods has Exxon boosting spending to more than $30 billion a year by the mid 2020s, with major projects planned worldwide. But its production lag in the meantime has been difficult. Exxon’s first-quarter output was the worst since 1999, spurring a 3.8 percent share drop on Friday. The company’s shale business has been a small slice of the pie for the eight years, but is now its fastest-turnaround major project.

“It’s good dirt,” said Mark Stoeckle, who manages $2.4 billion including Exxon shares at Adams Express Co. in Boston. “But I don’t know how much the Permian can move the needle near term.”

After entering shale with the the $35 billion acquisition of XTO Energy in 2010, production was minimal compared with Exxon’s global reach. Now it’s becoming a critical component of the company’s strategy. It wants to increase production to around 800,000 barrels a day by 2025, equivalent to about 20 percent of its global output today.

U.S. rival Chevron Corp. is following a similar path in the Permian, capitalizing on its low-royalty acreage inherited from the collapse of the Texas-Pacific railroads in the 19th century. It had 17 drill rigs in the basin as of Friday, compared with Exxon’s 27, according to Drillinginfo Inc.

The stakes are high for Exxon and Woods, whose other global projects such as offshore production in Guyana won’t add significant production until the early 2020s. Exxon’s shares have tumbled so much against rivals this year that its market value is just $35 billion more than Royal Dutch Shell Plc. A year ago the figure was $175 billion.

While U.S. shale can provide a timely boost for Exxon’s production figures, the company says it’s not chasing volume for the sake of it. Returns on shale wells are more than 10 percent at $35 a barrel crude, according to a March presentation. Current prices are almost double this, with West Texas Intermediate trading at $68.10 a barrel at 6 p.m. in New York on Friday.

Shale wells can be completed in months rather than years for other major projects. That “short cycle” provides a helpful counterweight to the mega offshore projects that the company is famous for, Sara Ortwein who runs the division, said in March.

The higher rig count as well as better efficiency in well completion rates will help grow Permian production in the second half of the year, Jeff Woodbury, head of investor relations, said on a conference call Friday without providing details.

But Permian growth will likely, at best, offset declines elsewhere.

There’s “no change to our communicated guidance that we would be generally flat with 2017,” Woodbury said.

©2018 Bloomberg L.P.

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