In the current landscape of the energy sector, the staggering investments exceeding $100 billion by the two largest oil companies in the United States, Exxon Mobil Corp. and Chevron Corp., demand close scrutiny. The driving force behind such monumental expenditures lies in the prolific output from two of the most promising oil fields globally.
As they unveiled their earnings recently, both Exxon and Chevron offered bullish forecasts for their production in the Permian Basin, a region within the United States already surpassing Iraq in oil supply. Projections indicate a remarkable 10% increase in production this year alone.
Exxon’s divulgence of a 70% surge in production from its expansive Guyana oil development in the first quarter of this year further underscores the magnitude of their operations. This surge alone could potentially cater to almost a fifth of the global demand growth projected by the International Energy Agency for the year.
Guyana and the Permian Basin emerge as beacons of relentless production growth in an industry that has grappled with the challenge of discovering new, economically viable resources in recent times. Capitalizing on this potential, Exxon and Chevron are engaged in a neck-and-neck race to solidify their dominance, outstripping their European counterparts in the process. Exxon’s imminent acquisition of Pioneer Natural Resources Co. for a staggering $64 billion is poised to catapult it to the apex of Permian Basin producers, while Chevron’s $52 billion investment in Hess Corp. secures a significant 30% stake in Guyana’s lucrative Stabroek Block.
Neal Dingmann, an analyst at Truist Securities, underscores the significance of the Permian and Guyana in driving growth for both companies. He highlights concerns over U.S. inventory levels and global shortages due to insufficient investments in the sector over recent years.
Following a period of reduced investment as fossil fuel companies prioritized returns and emission reduction, the resurgence of oil and gas investment underscores the tightening crude supplies. Brent oil recently breached the $90 per barrel mark for the first time since the fall, with geopolitical tensions in the Middle East exacerbating price volatility. Despite concerted efforts towards renewable energy sources, the IEA forecasts a robust 1.3 million barrels per day increase in oil demand this year, reaching a new record high.
In stark contrast, European energy giants Shell Plc and BP Plc find themselves in a divergent trajectory. Shell’s strategic withdrawal from Guyana before Exxon’s groundbreaking discovery in 2015, coupled with the divestment of its Permian assets to ConocoPhillips in 2021, places it in a markedly different position. BP’s footprint in the Permian pales in comparison to its U.S. counterparts, while both companies have redirected their focus towards bolstering oil and gas production in light of the challenges posed by renewables.
For Exxon and Chevron, stalwarts in the realm of fossil fuels amidst the rise of ESG (Environmental, Social, and Governance) investing, targeting the Permian and Guyana signifies not just production growth but also a reduction in overall supply costs. Both regions boast the ability to produce oil profitably at less than $35 per barrel, ensuring competitive advantages in the market.
However, despite the allure of these growth engines, both companies must exercise prudence in spending, as investors continue to prioritize capital discipline and a robust balance sheet. Nick Hummel, an analyst at Edward D. Jones & Co., emphasizes the importance of maintaining financial rigor, especially in light of the 5 million barrels per day of OPEC production potentially re-entering the market.
While awaiting the closure of the Pioneer and Hess acquisitions, both Exxon and Chevron find themselves in a holding pattern. Regulatory hurdles, such as approval from the Federal Trade Commission for Exxon and arbitration proceedings regarding Hess’s stake in Guyana for Chevron, pose challenges. Nevertheless, both companies express confidence in completing their respective deals by year-end.
In the grand scheme of things, these acquisitions represent transformative moves that are poised to reshape the growth trajectory of both Exxon and Chevron. As Hummel aptly puts it, the spotlight now shifts to execution in the upcoming quarters, as these behemoths navigate the complexities of integration and expansion.
