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Key Takeaways from Q1 Earnings: LNG, Deepwater and the Permian Basin

By Peter Staas on Apr. 27, 2018

Chevron Corp (NYSE: CVX)

With 29 rigs operating in the Permian Basin and a massive acreage position from its legacy holdings, Chevron’s operational scale in this red-hot basin, free cash flow and strong balance sheet give it’s a significant advantage over the competition. And the company isn’t shy about throwing its weight around to extract favorable terms on takeaway capacity and oil-field services. The company’s output in the region averaged 100,000 barrels per day, and management’s guidance calls for this output to grow by 30 to 40 percent annually through 2020.

  • On takeaway capacity in the Permian Basin:“We get highly competitive rates and then they execute on infrastructure projects that quite frankly might not compete in our portfolio. And we view that as activating our value chain at the lowest possible capital investment, which is kind of a return driven mentality. We will hit moments of tightness and length, but we like our position moving forward.”
  • On service-cost inflation in West Texas: “I would like to take a moment though and acknowledge that we’re largely projected in our Permian cost structure this year because of the contracting strategies that we have followed. And this is, again, one of the benefits of having a 20-rig program that has been long planned and we’re well disciplined around it. It has allowed us to line out all of the services and contract arrangements that we have needed well in advance. And so we have about two-thirds of our spending this year that’s either occurring at known prices or index costs or have cost containment capability built into them.”

On the call, management expressed a preference for ongoing investment in the Permian Basin, citing the quality of the resource and opportunities to lower development and operating costs. As for new deepwater projects, tie-backs and fields that can use existing facilities offer the best economics. However, the industry continues to focus on reducing deepwater exploration and development costs. A significant decline day-rates for offshore drilling rigs helps, but a lot of work remains. We’ll continue to monitor the industry’s progress on this front.

  • “I’d just say the first opportunity we’ve got obviously is infill drilling and keeping existing facilities fully loaded here. And to the extent that there’s a Deepwater — a new reservoir found that can tie into existing facilities, as obviously that’s — the economics there would be stronger. But we are working to get the development costs of greenfield down significantly. So, standardizing on surface facilities, design one build many, standardizing along with the industry on subsea kit. We are also in a mode here now where we would be designing the production facilities perhaps not for peak production but for the best capital efficiency. So longer subsea laterals. There’s just an awful lot that we think we can do in the deepwater area to continue to get development costs down. But we have to see that actually materialize before we would be in a position to take an FID {final investment decision].

 

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