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Battered oil majors give guidance on Permian production, IMO 2020 impacts

(Photo credit: Shutterstock)

American oil production is expected to grow 7.2% next year to 13.2 million barrels per day; pipeline takeaway capacity from the Permian Basin will grow 2.4 million barrels/day, threatening crude by rail; and oil majors are already enjoying widening refining margins in anticipation of IMO 2020.

ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX) and Royal Dutch Shell (NYSE: RDS.A) reported their financial results for the third quarter of 2019 on Oct. 31 and Nov. 1.

All three companies experienced deeply negative year-over-year earnings growth, mostly due to price action in global petroleum markets, which affected realized prices from oil and gas sales. West Texas Intermediate crude oil prices are down 12.6% since Nov. 1, 2018, to just over $55/barrel today.

ExxonMobil’s fully diluted earnings per share (EPS) fell to $0.75 for the quarter, up 2.74% sequentially but down 48.6% year-over-year. Chevron’s EPS plummeted to $1.36, down 40% sequentially and 35.5% year-over-year. Shells’ earnings fell to $0.59 per share, up 37.2% sequentially but down 13.2% year-over-year.

Oil company investment and performance are relevant to transportation and logistics for three reasons. 

First, investments by oil majors in exploration and production in North America are a significant driver of freight demand. Second, midstream investments in pipeline construction, especially pipelines that add to the takeaway capacity of the Permian Basin, will have a permanent impact on demand for crude by rail and crude by truck. Third, the oil majors’ guidance for downstream earnings — which includes refineries producing diesel fuel — holds clues to the impact that IMO 2020 will have on distillate demand and the spread between crude and diesel prices.

Guidance on North American exploration and production

The hydraulic fracturing (“fracking”) of shale oil formations in North America is a significant driver of truckload demand to move equipment, people, sand, water and chemicals. Hundreds of truckloads are associated with the drilling and completion of each frack well, and because they tend to experience rapid losses in production after the first year, wellhead equipment is moved and more wells are drilled than in conventional oil deposits.

Of the three companies, ExxonMobil has the most aggressive projections for production growth in the Permian and Bakken shale basins, with plans to essentially triple its production to nearly 1.4 million barrels per day. Permian production increased 7% sequentially in the third quarter and was up 72% year-over-year.

(Graph: ExxonMobil)

Chevron produced 455,000 barrels/day in the Permian Basin in the third quarter, up 35% year-over-year, and said its projected oil and gas production growth of 4-7% next year would be driven largely by growth in the Permian Basin and by other shale and tight rock plays.

Royal Dutch Shell does not have a large North American portfolio but has Shell-operated shale projects coming online in the Permian Basin and Fox Creek, Alberta, in 2019-20 which will produce, at peak, 250,000 barrels/day.

The oil majors’ expansion of Permian production has to be read against a backdrop of struggling independent producers, many of whom have been cash flow negative and are finding themselves capital-constrained as commodity prices fall. In other words, shale production in North America is consolidating rather than expanding dramatically, although it is still expected to grow year-over-year in 2020.

Recent forecasts from the Energy Information Administration (EIA) project slowing overall production growth in the Permian Basin for 2020.

“EIA expects growth to pick up in the fourth quarter as production returns in the Gulf of Mexico and pipelines in the Permian Basin come online to link production areas in West Texas and New Mexico to refining and export centers on the Gulf Coast,” the EIA wrote in its October Short-Term Energy Outlook. “However, EIA forecasts growth to level off in 2020 because of falling crude oil prices in the first half of the year and continuing declines in well-level productivity. EIA forecasts U.S. crude oil production will average 12.3 million b/d in 2019, up 1.3 million from the 2018 level, and will rise by 0.9 million b/d in 2020 to an annual average of 13.2 million b/d.”

For 2020, the EIA expects American crude oil production to rise 7.4% to 13.2 million barrels/day.

Guidance on Permian Basin pipeline construction

This year, nearly every Class 1 railroad experienced strong growth in the Petroleum Products commodity class, which includes crude by rail. CSX’s petroleum carloadings are up 4.9% year-over-year, Norfolk Southern are down 3.3%, Union Pacific are up 22.4%, BNSF is up 19%, Canadian National is up 20.4%, Canadian Pacific is up 13.1%, and Kansas City Southern is up 25.6%.

Except for the Canadian rails, which will be able to continue shipping crude due to provincial Alberta policy, those volumes may be under threat from new pipelines that can move crude oil even more cheaply than the railroads.

Of the three oil companies, ExxonMobil is the only one with significant midstream assets in the United States. ExxonMobil is participating in a joint venture with several other midstream players to build the Wink to Webster crude oil pipeline, which will add 1 million barrels/day of takeaway capacity from the Permian Basin to refinery facilities on the Gulf Coast. That pipeline is projected to come online in early 2021.

Simply put, there are a number of pipeline projects funded and underway in the Permian Basin. On its earnings call this week, Enterprise Products (NYSE: EPD) CEO Jim Teague said the company’s Midland-to-ECHO 3 and 4 Permian crude pipeline system expansions will add about 900,000 barrels/day of capacity in total. Phillips 66 has a new 900,000-bpd pipeline, the Gray Oak, which is still undergoing testing. It’s the last of three major pipelines connecting the Permian to the Gulf Coast to come online this year. The other two, the Plains All American Cactus II and Kinder Morgan’s Gulf Coast Express, will move 670,000 barrels of oil and 2 billion cubic feet of natural gas per day, respectively.

That’s a total of 2.4 million barrels/day of additional takeaway capacity. For reference, the newer tanker railcars, which are being phased in due to safety concerns, carry about 675 barrels each. The new pipelines will therefore replace roughly 3,555 railcars worth of crude-by-rail demand each day.

Guidance on downstream earnings and IMO 2020 impacts

It’s impossible to predict the price of petroleum commodities, but oil majors are reporting widening spreads between crude and diesel and sour/sweet distillates (i.e., high-sulfur and low-sulfur distilled products like gasoline, diesel and marine fuel oil).

Royal Dutch Shell said its downstream earnings were positively impacted by “stronger contributions from oil products trading and optimisation, as we realised opportunities from our well-positioned and integrated portfolio in the lead up to the International Maritime Organisations’ stricter environmental rules for shipping fuel, which will start on the 1st of January 2020.”

ExxonMobil said clean/dirty spreads were widening, which favors more complex refineries.

(Charts: ExxonMobil)

Chevron was reticent on the effects of IMO 2020 in its earnings presentation, but we note that the company enjoyed $255 million of margin expansion in its downstream business in the third quarter on a sequential basis, which followed a $260 million sequential downstream margin expansion in the second quarter. The vast majority of that was driven by better margins in Chevron’s Asian refineries, the company said. Seven of the global top ten container ports by throughput are located in Asia.

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John Paul Hampstead

John Paul conducts research on multimodal freight markets and holds a Ph.D. in English literature from the University of Michigan. Prior to building a research team at FreightWaves, JP spent two years on the editorial side covering trucking markets, freight brokerage, and M&A.