Chevron, Exxon and other big firms, once slow to see fracking’s potential, now outpace smaller drillers
Smaller, nimbler companies pioneered the U.S. shale boom. But as American production scales up, those frackers are losing ground to Big Oil.
Giant companies such as Chevron Corp. CVX +1.85% and Exxon Mobil Corp. XOM +1.06% are increasing shale production faster and with fewer complications than their smaller rivals. Their superior size and deeper pockets give them an edge in planning large drilling projects and locking in the pipeline and labor deals needed to ensure profitability.
Exxon doubled its shale rigs across the U.S. from the end of last year through September and became the most active driller in the country, according to industry tracker RigData. Chevron’s output in the Permian Basin of Texas and New Mexico rose 80% for the year ended in September, eclipsing some of the small producers that spent years building up their fracking positions.
“You need scale once you’re in development mode to be able to succeed at the margins that you have,” said Jeff Shellebarger, Chevron’s president of North America exploration and production.
Size also helps larger companies weather volatility in the oil markets, where U.S. crude prices have plunged more than 20% in the past month to about $56 a barrel. The bigger companies kept spending in check as oil rallied earlier in the year, making them less vulnerable to the recent selloff. As a result, Exxon shares have fallen only 4% in the past 30 days, compared with the 17% decline in the index of smaller producers, according to FactSet.
Smaller exploration and production companies recently reported their best third-quarter performance in five years, thanks to higher oil prices earlier in the year. Of 27 independent producers, 23 were profitable, including EOG Resources Inc. and Continental Resources Inc. The companies’ collective net income totaled about $6 billion, compared with $2 billion in losses a year ago.
Big Oil Takes to ShaleLarge companies are expanding rapidly inshale.Number of U.S. drilling rigs by companySource: RigData*BP acquired BHP’s shale assets earlier this year
Bigger producers also reported strong quarters. Global oil companies including Exxon, Chevron, BP PLC, Royal Dutch Shell PLC, Occidental Petroleum Corp. and ConocoPhillips made almost $5 billion in the quarter from their North American drilling units, up from a $373 million loss. While those results include areas such as the Gulf of Mexico, most companies said shale production was a significant factor.
The bigger companies have benefited in shale drilling from being able to ramp up production with fewer obstacles from Texas to North Dakota. Smaller operators, meanwhile, faced challenges such as pipeline bottlenecks that forced some to scale back drilling plans or move rigs away from areas where the constraints were most severe.
“Scale is so important in shale,” said Uday Turaga, chief executive of ADI Analytics, an energy consulting firm. “You can drive down costs from suppliers, secure pipeline access more quickly and get better contracts.”
Independent exploration and production companies also hedged much of their oil production to protect themselves from the downside risk of falling oil prices. That was crucial protection for many smaller, less well-financed shale companies, but it prevented them from fully capitalizing on the upswing in oil prices.
About three-fourths of the smaller companies have spent more cash than they have generated from drilling so far in 2018, a metric many investors track to monitor the financial sustainability of the industry. Collectively, they have outspent their cash intake by about $5 billion, according to FactSet data.