Exxon, Chevron planning big expansions in shale drilling, a move which could shake up the industry

Key Points
  • Last week, both Exxon Mobil and Chevron said they would boost their growth in the Permian basin substantially.
  • Big oil's shale push was a topic of discussion at the industry's annual IHS Markit CERAweek conference.
  • "I do think it raises the bar..I think what we've seen in shale is the benefits of scale are real," said one analyst.
A drilling crew member on an oil rig in the Permian Basin near Wink, Texas. 
Nick Oxford | Reuters

Big oil is getting even bigger in shale, and that could speed up a shakeout among independents and force more mergers and joint ventures.

Last week, both Exxon Mobil and Chevron said they would boost their growth in the Permian basin substantially.

"All those companies [the majors] have demonstrated multi-decades history of delivering well on larger projects," said Nathan Strik, energy utilities sector leader at Fidelity.

Exxon expects to boost production to 1 million barrels a day in five years in the 75,000 square mile area that runs through West Texas and southeastern New Mexico. Chevron expects to more than double its output to 900,000 barrels a day in four years.

The contrast between those major producers, who can realize profits even when oil prices are low, and some others in the oil patch was a topic of discussion at the industry's annual IHS Markit CERAweek conference.

'Benefits of scale are real'

"I do think it raises the bar..I think what we've seen in shale is the benefits of scale are real," said Strik.

The industry, punished by the stock market, has been under pressure by shareholders to cut costs and boost stock prices. Companies have cut back sharply on capital expenditures.

"I think the market underperformance was significant enough, long enough and across a broad swath of the sector. I do think there are plenty of companies out there in this industry with pretty attractive paths forward," said Strik.

Analysts said it may be that some of the stocks have hit bottom.

Osmar Abib, global head of oil and gas investment banking at Credit Suisse, said he even sees the potential for IPOs to test the waters in the second half of the year.

"I think the companies are listing quite carefully, and some are changing dramatically," said Abib.

"If you're a quality company, with reasonable growth and a differentiated position, there's no problem getting capital," he said.

Strik said the majors have better cash flow and revenue growth but others in the industry do have the potential to get to the point there they have free cash flow of 4 to 6 percent and revenue growth of 3 to 6 percent.

"I don't think you need to be a major to do that," he said.

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