Breakeven Mis-belief

 The energy sector is once again engaged in the "break even" debate, intensified by declining oil and gas prices and the sustained reality of systemic overproduction. This situation compels producers to justify their operations despite having “restructured” their cost base through consolidation, creating a financially tenuous position. This analysis suggests that reported "break even" figures for Permian Basin oil and gas production may be significantly understated. People, Ideas & Objects are rightly questioning Reported Breakevens

Major consolidated producers are currently claiming WTI breakeven prices as low as $40 per barrel, with ExxonMobil stating its core "premium" Permian inventory (post-Pioneer acquisition) has a WTI breakeven in the low-$30s, and some of its best acreage approaching the high-$20s on a half-cycle basis.

Key Caveats on Producer Claims (ExxonMobil Example):

• These are development breakevens (NPV-positive at 10%), not corporate cash breakeven.
  
  

• They assume optimal conditions: full-field development, long laterals, pad drilling, and integrated infrastructure.
  
  

• Crucially, they exclude sunk acquisition costs, such as the $65 billion paid for Pioneer Natural Resources.

To illustrate the potential understatement, consider a representative $10 million well (drilling, completion, equipping, and takeaway capacity) on a 15,000-foot lateral. While initial production may be high (e.g., 1,100 boe oil and 900 boe gas), steep decline rates (60–70% in the first year, 30–40% in the second) can drop production to approximately 100 boe/d within a few years, without subsequent interventions.

Several key cost exclusions and problematic assumptions lead to an artificially low breakeven point:

1. Selective Criteria: Breakeven is often structured for payback within the first two years based on selective cost inclusion.
   
   

2. Excluded Operational Costs: Royalties, operating expenses, and corporate overhead are frequently omitted.
   
   

3. Acreage Bias: Calculations are based on premium acreage and may not represent the average shale well.
   
   

4. Associated Gas Valuation: Associated natural gas is valued at the Henry Hub benchmark, which ignores wide regional differentials. When realized prices approach zero or become negative (e.g., sold/disposed of at –$0.25/Mcf), a significant cost is created in terms of breakeven. If $5.00/Mcf is a profitable price the loss will be $4.50 + $0.25 = $4.75 requiring ($4.75/$0.50) 9.5 profitable natural gas volumes to cover the loss. Material downward adjustments in natural gas reserves are not considered in producers breakeven calculations.
   
   

5. Exclusion of Acquisition Costs: Acquisition premiums are not allocated to individual wells. For example, ExxonMobil's Pioneer acquisition premium amounted to approximately $90,210 per daily boe of production at the time. Allocating a proportionate share of this premium to a new well—factoring in its rapid production decline—would drastically increase the effective capital cost.

Recalculated Breakeven Example:

By integrating a proportionate share of the Pioneer acquisition premium ($41.5 million) into the capital cost of the model well, the total breakeven target for capital alone is estimated to be $129.21 per barrel for the total oil volumes produced (estimated ultimate recovery of 386,946 barrels), assuming the monetary value of natural gas production is a wash. This figure is substantially higher than commonly quoted prices. Peer Comparison of Claimed Breakevens (Late-2025)

Peer Comparison of Claimed Breakevens (Late-2025)

• ExxonMobil.
  
  

• Claimed Breakeven (WTI): $30–35 (Best: high-$20s)

• Narrative & Edge: "Manufacturing mode shale." Post-Pioneer scale, integrated infrastructure, lowest unit costs.

• Strategic Risk: Diminishing returns if development pace outruns geology.
  
  

• Chevron.
  
  

• Claimed Breakeven (WTI): $35–40 (Best: low-$30s)

• Narrative & Edge: Capital discipline over growth, optimizing for free cash flow. Conservative spacing, lower decline profile.

• Strategic Constraint: Smaller Tier-1 inventory relative to Exxon.
  
  

• ConocoPhillips.
  
  

• Claimed Breakeven (WTI): $35–40 (Best: low-$30s)

• Narrative & Edge: Portfolio optimizer; Permian competes internally with other basins. Strong execution consistency, disciplined reinvestment rate.

• Strategic Constraint: Permian is not a strategic centerpiece, limiting scale efficiencies.
  
  

• Diamondback Energy.
  
  

• Claimed Breakeven (WTI): $30–35 (Best: high-$20s)

• Narrative & Edge: "Pure-play efficiency leader." Best-in-class well execution, short decision cycles.

• Strategic Constraint: No downstream integration, higher volatility exposure, capital access sensitivity.

Skeptical Take: All major producers focus their quoted breakevens on "Tier-1" inventory, neglecting the higher costs and diminishing returns from "Tier-2+" acreage exhaustion. While Exxon benefits from scale, pure-play operators like Diamondback often achieve superior economics on a well-by-well basis.

Executive Summary:

• Exxon is positioned to have the lowest-cost shale manufacturing system due to scale.
  
  

• Diamondback is often considered the best operator in terms of pure execution efficiency.
  
  

• Chevron is focused on capital stewardship and lower corporate risk.
  
  

• Conoco is the best portfolio allocator, managing the Permian within a diverse portfolio.

Greater transparency and the inclusion of all relevant costs—particularly acquisition costs and realistic associated gas valuation and volumetric adjustments—are essential for a more accurate assessment of shale profitability and sustainability.

In Conclusion:

The consistent failure of producers to address their poor financial performance is striking. People, Ideas & Objects has observed producers, over decades, pivot from one excuse to another, with the only constant being the coordinated delivery of their message.

As we've documented, they have demonstrated an inability to generate profit. Significant losses stemming from a lack of genuine profitability have impacted an industry soon to be crucial in supplying the energy that fuels our progress. This responsibility has been evident, yet deliberately ignored. The officers and directors of these producer firms—the only ones with the authority, resources, and duty to act—have consistently failed to do so.

Consequently, People, Ideas & Objects offers a material value proposition, repeatedly validated by the inaction of producer officers and directors. The established history shows their decade-plus inability to effectively respond to investors. What we see as a positive sign is that the need for change is widely recognized, and the multi-decade adherence to the current status quo is proving fatal to their current administration.