The Permian Basin has been in the thick of things -- vast portions of the oil-rich acreage changed hands last week. Debt-ridden Chesapeake Energy (NYSE: CHK) sold most of its Permian properties for net proceeds of $3.3 billion. While it's a loss of some very valuable resources (and approximately 6% of the company's total production), this looks like a steal for buyers Chevron (NYSE: CVX) and Royal Dutch Shell (NYSE: RDS-B). These exploration and production giants should consider themselves fortunate to get their hands on some lucrative resources, given their struggles against declining production over the past few quarters.
Why the Permian Basin matters
Recently, the Energy Information Administration, or EIA, brought out a report that the Permian Basin is "showing signs of new life." For the first time since 1998, last year's oil production volumes hit the 1 million barrels per day mark, and it has been rising ever since. You can access the report by clicking here.
Chevron's acquisition of 246,000 net leasehold acres in the Delaware Basin (a part of the Permian Basin) is over and above the 700,000 acres it already holds here. As a result, production should immediately go up by 7,000 barrels per day. However, in all probability, CEO John Watson and company must have eyed the potentially huge ramp-up in production volumes from the latest acquisition. Chevron definitely must have witnessed some solid production from its existing Permian acreage; otherwise, it just would not make sense to go for another huge acquisition in the same region. And EIA's report backs that up.
Desperate to make up
In terms of production, the second quarter had been pretty unimpressive for the San Ramon-based company. U.S. upstream earnings fell a substantial 33% to $1.32 billion compared to the year-ago quarter. While falling crude oil and natural gas prices have been the primary cause, it did not help Chevron one bit as average production volumes fell 5.1% (or 35,000 barrels per day).The net liquids component too fell 4%.
The Permian acquisition should add to Chevron's top line since these resources primarily will increase liquids production. Given the lousy natural gas market, I believe this was a timely acquisition.
Foolish bottom line
Despite the recent slip-ups in its North American operations, Chevron's overall business looks solid. This is what I'd call an energy stock for the long term. And it's nice to see management making quick amends and jumping into opportunities whenever available. The Motley Fool will help keep you updated on the latest developments analyses on Chevron. All you need to do is add the company to your free Watchlist.
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