Supermajors Need to Invest Nearly $30 Billion in Permian Basin through 2020 to Meet Volume Targets, Further Exacerbating Service Shortages, IHS Markit Says

A new energy report from business information provider IHS
Markit (Nasdaq: INFO) says that the three supermajors active in the
Permian Basin — Exxon Mobil (XOM), Royal Dutch Shell (RDS) and Chevron
(CVX) — will need to invest nearly $30 billion in the oil and gas play
through 2020 to achieve growth targets. These investments will catalyze
cost inflation and will gradually force consolidation in the basin, the
report says.

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Supermajor Permian Investment Forecast Source: IHS Markit 2018 (Grpahic: Business Wire)

“If truly committed to the Permian Basin, the traditionally
return-focused supermajors will have to grow accustomed to a rising
cost-basis in order to build their core, operated-acreage positions that
currently do not suffice to meet medium- to long-term growth plans,”
said Sven del Pozzo, CFA, director of energy equity research and
analysis at IHS Markit. “IHS Markit estimates that the supermajors will
need to collectively invest nearly $30 billion in new
investments—effectively adding three companies the size of Pioneer
Resources to the Permian, to achieve their production growth targets by
year-end 2020.”

Del Pozzo is author of the IHS Markit report entitled: “Company Play
Analysis—Permian: Supermajors are a disruptive force, catalyzing cost
inflation and forcing gradual consolidation.”

However, while there is great optimism about this level of investment in
the play, the supermajors’ growth plans will naturally enhance execution
risk and cause financial stress for smaller E&P (exploration and
production) companies, the IHS Markit report says.

“Many of these smaller Permian independents issued strong growth
projections after going on equity-financed acquisition binges in 2016
and early 2017, facilitated by share prices that reflected high
expectations for growth,” del Pozzo said. “The supermajors will further
stress the Permian service sector, and as costs escalate, the increased
execution risk may be too great for these smaller companies to overcome,
possibly forcing them into mergers or sales.”

This theme, del Pozzo said, was more recently exemplified by Concho
Resources’ acquisition of RSP Permian. RSP had been one of the smallest
pure-play Permian independents before making itself a much bigger, and
much more appetizing, target for a big company.

IHS Markit believes Concho was willing to pay a premium for RSP, whose
assets were nearly all core, and therefore deserved a scarcity premium,
del Pozzo said.

“Notwithstanding what we estimate was a premium price paid for RSP’s
assets, Concho’s move might have been strategically prescient,” del
Pozzo said. “Prior to the deal, industry service-cost inflation was
already apparent, as was the benefit of scale.”

Since 2017, the Permian well performance of the three big supermajors
has been catching up to that of the E&Ps, IHS Markit said. Exxon Mobil
has recently drilled a few ‘monster’ wells in southeast New Mexico, del
Pozzo said.

“What may be most exciting for service companies active in the Permian
Basin is the concept that the supermajors could source funds from their
non-U.S. cash flow,” del Pozzo said. “All the supermajors have a
relatively low Permian cost-basis, which was provided by cheap
acquisitions of assets prior to the boom in Permian unconventional
development. If the return-focused supermajors are to remain committed
to the Permian, they must accept the reality of a rapid escalation of
their cost-basis that will accompany their medium-to long-term growth

These growth plans come as IHS Markit foresees a doubling of production
growth in the Permian by 2023, as noted in the research released June
13, 2018: New
IHS Markit Outlook –“Stunning” Permian Basin Oil Production to More than
Double from 2017-2023, Exceeding Expectations.

To speak with Sven del Pozzo, please contact Melissa Manning at melissa.manning@ihsmarkit.com.
For more information on the IHS Markit report, entitled: “Company
Play Analysis: Permian: Supermajors are a disruptive force, catalyzing
cost inflation and forcing gradual consolidation,” contact clare.fletcher@ihsmarkit.com.

About IHS Markit (www.ihsmarkit.com)

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