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    With Buffett’s $10 billion in chips, Western Oil’s CEO Vicki Hollub made the biggest hand in the US oil industry. But she still can't win the game.
     
    On the last Friday of April this year, Warren Buffett received a call from Bank of America CEO Brian Moynihan asking if he would support Western oil companies' bid for rival Anadarko. Two days later, Western Oil Company CEO Vicki Hollub personally went to Omaha to make an appeal directly to the world's most famous investment company. Buffett agreed in less than an hour.
     
    On Sunday, the Berkshire Hathaway CEO promised that if Hollub could complete the deal, he would provide $10 billion in financing to Western oil companies. Of course, there is a complicated factor: Anadarko has promised to sell itself to the oil giant Chevron, and if it violates the contract, it will owe Chevron $1 billion. What followed would be a major change in the US oil-producing region, the famous Permian basin stretching from 86,000 square miles from Texas to New Mexico, where everything happens in a flash.
     
    A week and a half after the Buffett and Hollub meeting, the bidding war on the daily headlines ended: Chevron (11th in the Fortune 500) left, Western Oil Company (this year's Fortune 500 167th Name) announced that it will purchase Anadarko (the 237th Fortune 500) this year for a total price of $57 billion (including debt). This is the largest merger in the US oil and gas industry for more than 20 years (since Exxon has acquired Mobil), and the combined company is expected to rank among the top 100 Fortune.
     
    Buffett talked about his investment in an interview with CNBC. He said: "This is a long-term bet on oil prices, not for other reasons." But it is worth noting that he did not say whether he bets that oil prices will rise (he refused to comment on Fortune magazine on this matter). Buffett added on the TV show: "This is also a good bet on whether the Permian basin is as good as people say." But did not elaborate further.
     
    01 Permian Basin and future oil price range
     
    Of course, the Permian Basin is considered to be one of the largest oil reserves known in the United States. It makes the United States the largest oil producer in the world. Its thick shale formation, which is exploited by hydraulic fracturing, not only attracts Chevron, Western Petroleum and Anadarko, but also attracts hundreds of other drilling companies claiming to own the West Texas Basin. Part of it (also part of New Mexico). As we all know, the rise of the "hydraulic fracturing method" has pushed the US crude oil production to a record daily of about 11 million barrels in 2018, surpassing Saudi Arabia and Russia for the first time since the end of the Cold War. According to the latest monthly data, the daily production of crude oil in the Permian Basin alone exceeds that of the UAE, Canada or Iran; some people expect that by next year, US oil production may exceed Iraq, if the southwest region is classified as US territory, It will make the Southwest region the fourth largest oil producer in the world. Integrity Viking Fund CIO Mike Morey manages an outstanding energy equity fund. He said: "The Permian Basin is definitely a heavyweight player in shale gas."
     
    An independent economy: Permian now produces more crude oil per day than Iran and the UAE
     
    Not only in the United States, but also in the world, the Permian Basin is one of the lowest oil drilling costs. Unlike expensive deepwater and offshore drilling platforms, drilling companies can make money in the area as long as the trading price of oil in the Permian Basin is not less than $50 per barrel. Since the price of crude oil in the West Texas Basin plunged from a high of $107 a barrel in 2014, the region has been an oasis for troubled energy companies. Since then, oil prices have never approached three digits, and even fell to $26 a barrel.
     
    So far, oil prices have generally increased, rising by about 35% in 2019. However, it is difficult to find optimists who believe that oil prices have a reason to rise sharply. “There is no real continuing geopolitical event, not the rise of the cycle. No one knows that there is room for commodity prices to rise.” Researcher, Energy Research Center, Rice University Baker Institute for Public Policy, a longtime energy economist Michelle Michot Foss said.
     
    In fact, even if Iran’s sanctions were restarted in May, production disruptions, and the turmoil in other OPEC exporters such as Libya and Venezuela, the Permian Basin created such a rich supply to quickly compensate for losses. From the end of the Great Depression in 2009 to 2014, the oil industry has undergone a formal shift, said Morgan Stanley equity analyst Devin McDermott. “We have got rid of the shortage of resources and are no longer concerned about the peak oil supply – 'When will we run out of oil? ?' - Now we supply more oil than we need." More importantly, there are enough reserves in the Permian reservoir to maintain at least the next 20 years.

    Today, after many undulating crude oil cycles, oil companies are beginning to wonder whether the best results they can count on in terms of price are flat. Dan Pickering, president of Houston-based energy investment bank Tudor, Pickering, Holt & Co., said: "The industry realizes that they can't expect oil prices to rise." He expects future oil prices to fluctuate between $50 and $75 a barrel. . He said that after all, there are political forces at work. On the one hand, if oil prices fall to unprofitable lows, OPEC will prepare to cut production. On the other hand, Trump is determined to ensure natural gas prices remain. Low prices to promote the US economy. Pickering added: "My point is that we have already determined the price range for crude oil: OPEC will cut production to $50, and Trump will speak when it reaches $70." Trump has become more frequent since he took office. Talking about oil and gas prices on Twitter - by 2019, he has sent eight tweets, only three times in April - he is basically calling on OPEC to supply more to the market. oil.
     
    Oil prices may not blow out, but drillers are considering how to deal with them. In the past six months or so, US energy companies have cut capital expenditures, reduced the number of rigs, and increased their profitability, enabling them to maintain more cash flow. Jonathan Waghorn, a former Shell drilling engineer and now a portfolio manager at Guinness Atkinson, said: "We sometimes say, '$60 is the new $100."
     
    Ironically, the good days of the oil field in the past are not exactly the same. Waghorn said that even if the oil price reached $100 a barrel a few years ago, the company did not reach the level of return it should have. According to Morgan Stanley Investments, until last year, in those exciting days, US oil and gas exploration and production companies spent more on capital expenditures and dividends than cash flow, S&P 500 energy stocks from shale oil The revolution has been underperforming since the beginning. Bill Herbert, general manager and senior research analyst at Simmons Energy, said: "If a crystal ball is used to predict the birth of a US shale supernova, I think you might guess that these stocks will perform very well, but that's not the case."
     
    Over the years, the industry has plagued many investors, so many people have given up on it. But the deal with Western oil companies may rekindle interest. Interestingly, what Buffett’s $10 billion will be used for.
     
    02 Buffett's benefits
     
    This brings us back to Western oil company's full acquisition of Anadarko Petroleum and the scale of the Permian exploration. In the past few months, Western oil companies have gradually surpassed Chevron and become the largest oil producer in the Permian Basin, but it is very difficult to maintain it: Chevron has rapidly improved in the second The ambitions of the Jurassic Basin have recently promised to increase production by 53% by 2020.
     
    This is why Chevron wants Anadarko. The idea of ​​a marriage between two oil producers brought some unique advantages: the two companies controlled the blocks in the Permian Basin along the old Texas-Pacific Railway, meaning that the merger would make this piece The land is unified like a huge chessboard, further reducing costs. Competitors Western oil companies will be eliminated.
     
    On its own, Western oil companies may find it almost impossible to maintain the status of the largest oil producer in the region. That's why it has been  Anadarko – in fact, it has been negotiating with the company for a potential deal for nearly two years. When Chevron announced in mid-April that it would purchase Anadarko Petroleum, including $50 billion in debt, Western oil companies found themselves in a dilemma: if it wanted to buy Anadarko, it must be somehow End the Chevron deal and pay a billion dollars.
     
    In the Permian basin, there is little risk of wasting money on dry wells, because everyone knows that oil is found in dense rocks, known as shale formations. The location close to the Gulf Coast also facilitates the introduction of crude oil to the market, especially now that new pipelines are being opened. Foss said: "In many ways, this is really an ideal situation for the company. They have a complete value chain from the oil field to the market and have US coastal export rights. They have not done this for 30 to 40 years. It is."


    Through the acquisition of Anadarko, Western Oil will further strengthen its position in this golden region. Despite this, it paid a fairly high premium – $11 more than Chevron. As a return of 10 billion US dollars, Buffett won 100,000 preferred shares of Western Petroleum, with an annual dividend of 8%. Not everyone thinks this price is reasonable. In the three weeks after Western oil companies proposed the acquisition of Anadarko, the company's share price plummeted 13%, its shareholders criticized the acquisition cost is too high and Buffett got a better advantage in the transaction. T. Rowe Price, which holds a 2.8% stake in Western Petroleum, had (unsuccessfully) threatened to remove the company's board of directors at the May general meeting, complaining that management should have allowed shareholders to vote on the merger.
     
    “We think the Permian is the jewel in the crown of Western oil companies,” said John Linehan, chief investment officer of T. Rowe Price. He added that the assets of Western Oil Company here are the "core cause" of his initial investment in the company. But the strange thing is that the Anadarko acquisition diluted this reason. He said that although the combined company will have more blocks in the Permian basin, its overall production will be less concentrated in the Permian basin, as Anadarko has a larger share of production outside the region. . “This is not the biggest competition,” Linehan said. “This is a competition for the highest total return.”
     
    Western oil company CEO Vicki Hollub said in a statement to Fortune magazine. “We understand the Permian basin. This is the foundation of our company, but for us, the size is not important. For us, what really matters is not to be the biggest, but to be the best. I think we have already Proof of this.” Regarding bypassing shareholders’ vote on the deal, Hollub said in a recent earnings conference call that the company did this to ensure “there is a reasonable opportunity to achieve this goal” because Chevron’s agreement No need to vote. "We are not competing in a level playing field," she said.
     
    Self-injection wells in Texas: Oil workers work in Midland, Texas. Midland is the heart of the Permian basin, and many American oil companies are investing more here.
     
    On the other hand, if there is no Anadarko, Chevron will not be worse. Portfolio manager Waghorn said: "There are many good things in the sea. Anadarko has no special reason to stand out." In fact, now this large oil company has changed its willingness to buy, and many Permian basin producers see it. It is a potential acquisition target. Analysts see companies such as Pioneer Natural Resources, Noble Energy, Apache Corp., Concho Resources, Parsley Energy, and Diamondback Energy as acquisition targets. Pickering said: "I think that we may still have a transaction, it will usher in a wave of large-scale integration. If we see Exxon Mobil, Shell, BP or Total make another big deal, I think People will be scrambling to find integration targets and will be very worried about missed opportunities."
     
    In the still fragile hydraulic fracturing industry, the signs of the upcoming wave of mergers and acquisitions have reminded investment banker Pickering of the Internet boom of the late 1990s. At the time, investors chased high growth, and despite the meager profits of Internet companies, they still invested in them – forcing Internet startups to integrate before the final market crash. Pickering said: "This is happening in the oil field."
     
    As companies reduce drilling activity, US oil production growth will generally slow down in general. For them, if the oil price finally rises, the key will not be to increase production too aggressively, so as not to cause the oil price to fall again.
     
    After all, producers in the Permian basin themselves may have incentives to control supply and prices. Because they can make money with cheaper oil than many drilling companies outside the US, they face less competition when oil prices are low. John Musgrave, portfolio manager and co-CIO of Cushing Asset Management, said that if oil prices rise to $80 a barrel, more foreign competitors will start to increase production. "In theory, you almost never want crude oil prices to soar."
     
    As for Buffett, because of his preferred stock, he can make money regardless of the price of oil. This may be the most profitable move in the field for many years.

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