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00:00PERSPECTIVE. JOHN KERNAN, RETAIL ANALYST. WE ARE HEARING WHAT HE BANKS ARE LOOKING AT AND FOR ME THAT IS OIL. EQUITY RESEARCH ANALYSTS ARE COVERING OIL AND GAS LONDON. I WANT TO LOOK AT THE OIL PRICE. TAKE A LOOK AT THE TERMINAL RIGHT AROUND THAT 50 DAY MOVING AVERAGE. A LOT OF DOWNSIDE YESTERDAY. THE NEW COMPANIES ARE RAMPING UP PRODUCTION ON SHALE. NOW, BIG OIL IS GETTING IN ON THE GAME. EXXON, ANALYSTS SPENDING FIVE AND A HALF MILLION DOLLARS THIS YEAR TO DRILL IN THE PERMIAN AND THE BALKANS. IS THE ERA OF BIG OIL OVER? IS IT ALL ABOUT BIG OIL AND SHALE? >> YOU ARE CERTAINLY SEEING THE INTEGRATED COMPANIES SHIFTING AS MUCH OF THEIR CAPITAL AS THEY CAN INTO WHAT WE CALL SHORT CYCLE PLANS AND THAT IS REALLY PRIMARILY SHALE. THEY WANT FLEX ABILITY IN THEIR CAPITAL SPENDING AND THE PRICES GO LOWER. THIS REALLY MEANS THAT THOSE COMPANIES SHOULD HAVE CAPTURED THE SALE POSITIONS LIKE EXXON OR CHEVRON. THEY HAD BETTER LEVERAGE. ALIX: BUT E & P'S ARE EVALUATED ON THEIR GROWTH AND NOT RETURNS. THE OIL IS REALLY ABOUT RETURN ON CAPITAL. IS THAT DILUTING THEIR VALUE? >> I THINK WE ARE ACTUALLY SEEING PLACES LIKE THE PERMIAN BASIN MOVING INTO MORE OF A MANUFACTURING TYPE. I THINK THE SKILL SETS YOU HAVE INCOME IS LIKE CHEVRON AND EXXON ARE SEATED TOWARDS EFFICIENT DEVELOPMENT THAT GROWS MAYBE NOT AS FAST AS ENG COMPANIES BUT GROWS SUSTAINABLY. CHEVRON CAN GROW WITH THEIR PRODUCTION AND STILL ENJOY A FREE CASH FLOW. ALIX: HOW MUCH MORE VALUE DO YOU THINK EXXON OR CHEVRON CAN PASS THROUGH SHALE? 668 BARRELS PER DAY. BECAUSE OF THEIR DEEP WELL OF ACCESS -- THEIR ASSETS, CAN THEY MAXIMIZE THAT EVEN MORE? >> WE COULD SEE --. WE ARE STARTING TO SEE THE INDUSTRY MOVE TOWARDS TWO MILE-LONG LATERALS. WELLS THAT ARE AVERAGING 1200. ALIX: IF WE DO SEE THAT, EXXON GROWING BY 20% A YEAR OVER THE NEXT EIGHT YEARS, WHAT DOES THAT DO TO THE OVERALL OIL MARKET AND OIL PRICES? THAT IS A GAME CHANGER. >> IT IS AND I THINK IT DOES MEAN THAT THE U.S. BECOMES A MORE IMPORTANT LOCAL SUPPLIER OF CRUDE OIL. THERE ARE GOING TO BE LIMITATIONS ON HOW FAST THE PERMIAN CAN GROW BUT IT IS A BIG NUMBER. THE PERMIAN COULD POTENTIALLY GROW AS MUCH AS A MILLION BARRELS A DAY INTO 2018 AND 2019. DEMAND ALSO GROWS BY A MILLION AND A MILLION AND A HALF. SHALE IS THE SUPPLIER AND DEEP WATER AND OTHER MORE EXPENSIVE SOURCES BECOME MORE CHALLENGING. ALIX: CAN YOU RANK THE BIG OIL COMPANIES AND WHICH IS THE BEST WAY TO CAPTURE THE TREND? >> I THINK CHEVRON IS BY FAR IN THE BEST POSITION. CHEVRON HAS A LEGACY POSITION IN THE PERMIAN BASIN THAT STRETCHES BACK 100 YEARS AND THEY ACTUALLY PAY NO ROYALTIES. EXXON'S ENTRY HAS BEEN FAIRLY RECENT. YOU SEE THE $5.5 MILLION ACQUISITION, THERE IS NO SCALING INTO THAT POSITION. NONE OF THE EUROPEAN INTEGRATED COMPANIES HAVE A FULL SHALE POSITION OTHER THAN SHELL. THEY ARE SMALLER THAN EITHER

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Why Big Oil Is Pivoting More to Shale

Jefferies Senior Equity Research Analyst Jason Gammel discusses the price of oil, the shift of capital to shale drilling and the growth of the Permian Basin. He speaks with Bloomberg's Alix Steel on "Bloomberg Daybreak: Americas.” (Source: Bloomberg)

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