(Bloomberg) — If you want to understand why America’s two largest oil companies are spending more than $100 billion on acquisitions together now, look no further than the amount of crude they’re extracting from the two fields hottest oil in the world. planet.
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Exxon Mobil Corp. and Chevron Corp., which reported results Friday, both forecast their production in the Permian Basin — the U.S. region that already supplies more oil than Iraq — will increase 10% this year.
Exxon also revealed that production from its massive oil development in Guyana in the first quarter jumped 70% from a year earlier. That’s enough to meet nearly a fifth of the growth in global demand forecast this year by the International Energy Agency.
Guyana and the Permian stand out for relentless levels of production growth in an industry that has otherwise struggled to find new, low-cost resources in recent years. Today, Exxon and Chevron are working to consolidate their positions, thus outpacing their largest European competitors. Exxon is poised to become the Permian’s largest producer once it completes its $64 billion acquisition of Pioneer Natural Resources Co., while Chevron will spend $52 billion on Hess Corp. to acquire a 30% share of the prolific Stabroek block in Guyana.
The Permian and Guyana “are important growth engines for both companies,” said Neal Dingmann, an analyst at Truist Securities. “There are certainly fears over US stocks and shortages around the world due to the lack of investment in the group for several years now.”
After years of cutting investment in oil and gas as fossil fuel companies focus on efficiencies and reducing emissions, crude supplies are once again starting to look tight. Brent oil earlier this month traded above $90 a barrel for the first time since the fall, as tensions in the Middle East threatened to send prices further higher. Despite all efforts to shift to greener energy sources, the IEA predicts that oil demand will increase by around 1.3 million barrels per day this year, reaching a new record.
European supermajors Shell Plc and BP Plc, which are expected to report results in the next two weeks, are in a very different position. Shell left Guyana a few months before Exxon drilled its first discovery in 2015 and sold its position in the Permian to ConocoPhillips in 2021. BP’s presence in the Permian is much smaller than that of the two US majors.
Additionally, Shell and BP have in recent years sought to move into renewable energy. They are now turning to strengthening oil and gas production. But that’s easier said than done, and both have an anemic growth profile through 2030 compared to their U.S. rivals – assuming the deals with Pioneer and Hess go through.
For Exxon and Chevron, both engaged in fossil fuels during the first wave of ESG investments, targeting the Permian and Guyana will not only increase production, but also reduce their overall cost of supply. Both regions can produce oil at a profit of less than $35 per barrel.
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Despite sitting on two big growth engines, both companies need to be careful with their spending as investors still view capital discipline and a strong balance sheet as a “top priority,” according to analyst Nick Hummel at Edward D. Jones & Co. because OPEC still has 5 million barrels per day “on hold” that could return to the market at some point, he said.
For now, Exxon and Chevron are stuck in a holding pattern, waiting to finalize the acquisitions of Pioneer and Hess. The first is awaiting approval from the Federal Trade Commission while the second is stuck in arbitration because Exxon claims to have a right of first refusal on Hess’ 30% stake in Guyana. Despite everything, both say they hope to finalize their respective agreements by the end of the year.
“These are significant transactions that will certainly impact the overall growth trajectory of both companies,” Hummel said. “The focus will be on execution over the coming quarters.”
–With help from Laura Hurst.
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