Does #Exxon Know The Value of Its Assets?

by Matthew Johnson

In recent months, ExxonMobil has been under fire after investigative reporters claimed the oil and gas giant knew about risks associated with climate change since at least the 1970s and hid that knowledge from the public.  Leading environmental groups called for the company to be prosecuted the way tobacco companies were prosecuted for hiding Smoking risks.  Mainstream politicians like Hillary Clinton joined in and New York Attorney General Eric T. Schneiderman launched an investigation.  In March 2016, attorneys general from 18 jurisdictions announced they are now part of his effort. In September 2016, the Wall Street Journal reported that AG Schneiderman had changed his aim and is now looking more closely at how Exxon values its assets.  The federal government has also launched a similar effort.

In addition to climate questions, the government wants to know if Exxon is hiding the damage it has suffered from low oil prices.  As our proprietary data shows, frac jobs decreased 50% from Q42015 to Q12015, and that foretold a corresponding drop in production and cash flow.  ONE THING TO NOTE IS THAT PRIMARY VISION’S DATA FOCUSES ON NORTH AMERICAN FRAC’ING AND THE MAJORITY OF EXXON’S BUSINESS IS INTERNATIONAL/OFFSHORE.

The Good:

First off, ExxonMobil is a pillar of American industry that traces its lineage back to the Standard Oil Trust that dominated world oil markets in the late 1800s.  The company has survived a lot of legal issues in its past, and when crude markets rebalance (or if OPEC is able to boost oil prices) then Exxon’s troubles may disappear.
This particular controversy has to do with the process executives use to sign off on calling reserves “proven” after reviewing data from engineers, geophysicists, and geologists.  Dropping oil prices and costly regulations reduce the value of these “proven” resources.  Most companies will write down that lost value, but write-downs reduce profits.  Exxon is notorious for refusing write-downs.  Exxon CEO Rex Tillerson sees this aversion as a good part of the company’s culture.  He says it avoids write-downs by placing a high burden on executives to ensure that projects can work at low prices.  Those executives will not be “bailed out” by having their projects written down in a bad market.

One thing that helps make this strategy viable for Exxon is that its operations are heavily centered in areas that continue to be economic at current prices.  In particular, this means the Permian Basin in Texas, and through it subsidiary XTO Energy the company also reaches the Williston Basin in North Dakota.  Our data shows these to be the most popular locations for frac jobs in recent years.

The Bad:

The flip side here is that Exxon could be seen as lying about the cost of climate or its losses associated with low oil prices.  The company has outperformed many of its rivals since oil prices began to drop in 2014, but it has lost money in its U.S. drilling business for the past six quarters.  By failing to admit that their reserves had lost value, Exxon was able to report higher earnings than rivals that made significant write-downs.  Some may say the company inflated its earnings to boost its stock price.

The Ugly:

Exxon is now facing two different investigations with overlapping aims.  First, New York AG Schneiderman and his coalition are pursuing allegations of fraud related to climate change.  AG Schneiderman also appears to be independently reviewing Exxon’s practices related to writing down assets and accounting for the cost of climate change.  Second, the U.S. Securities and Exchange Commission has now opened up an inquiry into the same issues of write-downs and climate accounting.

Conclusion:

Exxon has been on the attack against AG Schneiderman and what the company views as a politically-motivated attack, but Exxon has said the SEC is the “appropriate entity” to look into these matters.  Exxon is proud of its practices and it will likely hold up against government scrutiny as it has for decades.  History suggests commodity prices will rise again, and when they do Exxon’s troubles will seem minor.  Moreover, these investigations were just a chink in Exxon’s armor.  Stock prices took only a small dip after the SEC investigation was announced, and analysts like The Street Ratings still consider the stock a “hold” as the company is in a solid financial position despite weak cash flow and poor profit margins.

sources:

Disclaimer
The data presented above has a margin of error of 5-8% as a result of E&P and/or service company errors or incorrect data filings. Neither the information, nor any opinion contained in this site constitutes a solicitation or offer by Primary Vision or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service.

Marcellus Shale Market Trends Part 2: Is Average Proppant Mass Still on the Rise?

In our last post, we discussed a variety of factors that have influenced frac activity levels in the Marcellus shale, including continually rising natural gas production levels, basis differentials at regional market hubs relative to Henry Hub natural gas spot prices, and pipeline takeaway constraints. Reduced drilling and completion (D&C) activity by certain operators has been offset by increased activity by others. That said, there is little doubt that D&C activity would be more robust were it not for these factors. We also took a look at some notable acquisitions and divestments in the Appalachian Basin, the most notable of which was Southwestern Energy’s acquisition from Chesapeake Energy of 413,000 net acres and 435 wells with net production in September 2014 of 336 MMcfe.

Today, we delve into well completion designs that have been used in efforts to optimize well performance and what implications it has had for proppant use. In particular, we focus on 16 leading E&Ps active in the Marcellus.

With E&Ps in full-scale well manufacturing mode in the Marcellus, emphasis has shifted to increased operational efficiency to bring down or, at the very least, contain well construction costs. But just as we see across several oily basins, operators targeting both liquids-rich and dry-gas zones of the Marcellus (and Utica) shale have continued to fine-tune well and frac designs to optimize well performance.

In an effort to increase EURs and produce wells to their maximum potential, E&Ps in the Marcellus have been: 1) drilling increasingly longer laterals; 2) improving lateral placement in the reservoir; 3) increasing frac stage counts per well; 4) using shorter stage lengths (SSL) and reduced cluster spacing (RCS) completions (tighter spacing between stages and more perforations or “perfs” per lateral). RCS completions were first adopted in the Marcellus, and operators have been using the technique since early-2012. As Credit Suisse has suggested, RCS completions have become “almost universally adopted in the Marcellus.” Operators are more commonly evaluating well costs and economics based on per-lateral-foot basis.

In April 2012, Range Resources announced that 2 wells using RCS completions produced at twice the initial production rate (IP-rate) as compared to non-RCS wells on the same well pad. In September 2013, Antero Resources commented that using RCS frac designs in 17 liquids-rich Marcellus wells resulted in incremental frac costs that averaged 20% higher than previous designs ($2 million vs. $1.5 million per well). But the operator saw IP-rates increase by 25-35% compared to similar wells in the area. CONSOL Energy commented that when it first used RCS on two wells in early-2012, IP-rate improvements over non-RCS wells were not meaningful. However, the operator observed that after 15 months of production history, these two wells were 20% and 40% above the type curve, respectively.

What is the implication of all of this for proppant? Longer laterals, SSL/RCS completions, and increased stage counts per well all in isolation lead to increased proppant. But the contemporaneous adoption of all of these practices has led to significant increases in average proppant mass pumper per well.

We categorized 16 publicly-traded operators into peer groups as outlined in the table below. The E&Ps have collectively accounted for approximately 75% of frac activity in the Marcellus since 2012.

Marcellus Top-16 Operators

Notes: XTO Energy operates autonomously as a subsidiary of ExxonMobil and manages US Land upstream operations on behalf of its parent company; E&P categorization reflects that of Raymond James

The proppant mass index presented below uses weighted averages based on the number of wells frac’ed by operators within each peer group. The chart reflects growth of average proppant mass per well using 2011 Q4 as a base of comparison.

Marcellus-Average-Proppant-Mass-Index-12Q1-14Q3

Marcellus Average Proppant Mass Index (12Q1-14Q3)

Sources: Primary Vision

The findings are rather staggering. As a collective, average total proppant mass per well is up 2.3x between 2011 Q4 and 2014 Q3. Our analytics reveal that as a collective group, average proppant mass per well has increased at a 32% CAGR between 2012 and 2014.

As this trend has played out, it has had cascading impacts across the upstream supply chain. After a surge of manufacturing capacity expansion during 2012 and 2013 led to an oversupply and falling pricing, frac sand suppliers have seen significant demand growth bring the market back closer to balance over the past ~12 months and have realized . Proppant logistics have been challenging due to chronic shortages of rail cars and truck-trailers as well as intermittently by weather. During 2014, operators have reported delays scheduling frac due to temporary sand shortages. Certain frac services providers have commented that proppant hauling costs essentially doubled overnight during spring 2014 – sand haulers appeared to be colluding by simultaneously charging a per-truck day rate rather than on a per-load basis. Some frac services providers have rushed to lock in long-term supply agreements with sand suppliers.

Primary Vision’s customers leverage our Big Data solutions to gain meaningful insights on the latest market dynamics and act accordingly. By staying ahead of the curve, they can make data-driven tactical and strategic decisions that help increase their bottom line.