One Last Warning For The U.S. Shale Patch

36 minutes ago, Old-Ruffneck said:

The author of this story must be investor. Depending on what side of the street your on, consumer or investor it is good/bad news. Since I am a heavy consumer, good news for me.

https://oilprice.com/Energy/Crude-Oil/One-Last-Warning-For-The-US-Shale-Patch.html

Keep pumpin' baby!!

I think Mr. Berman is right.  The market remains oversupplied, and demand is falling off.  I don't see how prices can stabilize with that kind of downward pressure.

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3 minutes ago, Oil_Engineer said:

I think Mr. Berman is right.  The market remains oversupplied, and demand is falling off.  I don't see how prices can stabilize with that kind of downward pressure.

So if your a consumer, all good with price pressure downward. If your an investor, well not so good...…..

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You certainly are fixated on Harold.. So you may as well get your facts straight.

The divorce settlment from Sue Ann was for $974 million, yes the check cashed, he didn't fight the settlement, he's the one that offered the one time take it or leave it deal.

There is no trophy wife, the affair was presumably with the housekeeper in Enid.

Sue Ann got the ranch in California, the house in Enid and the mansion in Nichol's Hills.

Hamm hasn't been "desperate" in forty years. Like him or hate him he's a shrewd businessman who goes after what he wants.

I don't particularly care for some of his practices, but can't fault the man's tenacity

54ac62f5ecad0451666e9a33-1136-604.png

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5 hours ago, Old-Ruffneck said:

So if your a consumer, all good with price pressure downward. If your an investor, well not so good...…..

A good investor can work the market no matter which way it is going.

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5 hours ago, JJCar said:

Hamm was desperate at the time.  He traded in his wife of 30 years for a new young trophy wife and was going thru a divorce.  He settled with his ex wife, giving her $1 Billion settlement JUST BEFORE THE PRICE OF OIL (along with Continental stock price) crashed.  He tried to stop the settlement .  I don't know if he was successful.

not sure what that has to do with free markets? I might be missing something.  Hamm filed for divorce a bazillion years ago (90s maybe?), later to be rescinded. I don't know the particulars of the alleged (proven? idk) affair. I'm just suggesting that their relationship was troubled for many years--not sure how desperate he was. 

Still not sure where we're  going with this but... Sue Anne was a lawyer, you know, with decades of experience in the oil and gas industry.

She later privately funded a campaign to unseat the judge that presided over her divorce case--and was successful I might add.  A woman scorned and all.....

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8 hours ago, JJCar said:

Look at Authors clients.  (1) Shale Companies and (2) Investment Funds. 

Everyone has an agenda.

you may want to do basic research before embarrassing yourself with accusations like this.

Art Berman was vocal about issues of shale industry (lack of profitability being the main one) for many years.

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8 hours ago, Oil_Engineer said:

I think Mr. Berman is right.  The market remains oversupplied, and demand is falling off.  I don't see how prices can stabilize with that kind of downward pressure. 

Art changed his view on oversupply in light of new info on storage withdrawal. http://www.artberman.com/u-s-no-longer-over-supplied-with-oil-good-news-bad-news/

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11 hours ago, Old-Ruffneck said:

Bizarrely, I suddenly seem to find myself now on the low side of estimates for Brent average price for this year.

Does an average of $70 Brent for 2019 sound familiar to anyone here? ...  Do the words ad nauseum comments ring a bell?

 

"Analysts are making fairly aggressive calls for 2019 average Brent price of $74 and $83 in 2020. I hope those calls are right but I am less optimistic. That is because the world remains over-supplied with oil."

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13 hours ago, Oil_Engineer said:

I think Mr. Berman is right.  The market remains oversupplied, and demand is falling off.  I don't see how prices can stabilize with that kind of downward pressure.

Mr. Berman has a perfect track record of being 100% wrong for the last 10 years.  Think I will take whatever he says and throw it over my left shoulder as far as possible. 

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11 hours ago, JJCar said:

Justin how did you get a copy of the check ?

Are you dating Sue Ann ?

 

Just trying to help you out... Like I said, if you want to throw around info about Harold, you may as well get your facts correct.

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12 hours ago, DanilKa said:

you may want to do basic research before embarrassing yourself with accusations like this.

Art Berman was vocal about issues of shale industry (lack of profitability being the main one) for many years.

Art is a friend of mine and had, continues to have, the balls to question the shale phenomena for nearly two decades. He pegged the shale gas disaster, and IT's grossly exaggerated reserve estimates,  in the early 90's to a tee. 

Those of us that are concerned about how the shale oil industry can make good on all of its promises of abundance, when it is deeply in debt and cannot make a profit, have been surprised at the amount of money thrown at shale oil over the past 6-7 years and how much it has continued to grow by credit/debt. Art is old hand like myself and never in my career have I seen an oil "play" so woefully unprofitable last so long; most of the time by now an admission of economic failure occurs, folks stop spending their own money and move on to the next idea. The shale oil phenomena is different, of course, because very few are spending their own money. Its all OPM. Art has admitted he was wrong about the timing of shale decline, as I have, and others; does that mean it will never happen? 

No, of course not. Folks have a twisted view of what peak oil means. It means that the world is running out of affordable oil and affordable production may not be able to meet demand. That is exactly what is occurring. Shale oil is expensive to extract and nobody can make money at it. 

Art's agenda is to help bring awareness to a potential problem in our country and in our world. If one wishes  to rag him, contact him personally, it's easy, and use your own name. That is the honorable thing to do.

Thank you, Daniel, and for the comment on how integrated companies like XOM and CVX have a leg up on independents in the Permian. Like everything else in our society these days the debate about how this shale thing is going to work, economically, in the long run has turned very divisive and folks get to name calling, and labeling, and saying really stupid things in the comfort of their own home, behind a keyboard. Sadly I don't think a lot of these people have even seen a drilling rig, much less have ever written a check to be IN the oil business. Art has. 

 

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9 hours ago, Wastral said:

Mr. Berman has a perfect track record of being 100% wrong for the last 10 years.  Think I will take whatever he says and throw it over my left shoulder as far as possible. 

I doubt that is true.  It is all conjecture until you offer facts to support your statement.

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7 hours ago, Oil_Engineer said:

I doubt that is true.  It is all conjecture until you offer facts to support your statement.

You wish to invest your money around a statistical error, fine, as long as its not my money!

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As majors take over the tight oil production in the US, they may reduce completion rates to bring capital investment more in line with free cash flow, if they do so the current debt in the tight oil industry can be paid back and the industry may be profitable in the future, but much depends on future oil prices.  If the expansion of the BEV fleet continues at its current pace we may see oil prices peak in 2025 at $85/b and then decline, under that scenario tight oil may never become profitable.

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44 minutes ago, D Coyne said:

As majors take over the tight oil production in the US, they may reduce completion rates to bring capital investment more in line with free cash flow, if they do so the current debt in the tight oil industry can be paid back and the industry may be profitable in the future, but much depends on future oil prices.  If the expansion of the BEV fleet continues at its current pace we may see oil prices peak in 2025 at $85/b and then decline, under that scenario tight oil may never become profitable.

Last I checked, India has a Billion people who do not drive currently and so does China.  No, they cannot afford electric vehicles other than mopeds and golf carts of which they sell by the million by the way...  Of course they still need to get their power from somewhere... 

Solar/wind are not the solution in China that is for damned sure, China lives under clouds most of the time just like N. Europe.  Wind certainly is NOT for India.  Solar.... possible, but no grid, so they will not be going BEV either and this is true for all of SE Asia with another 0.5Billion people who are all coming into the modern age. 

Then there is that pesky fact that Africa's population is doubling and they all want to drive too.  Africa is becoming a heck of a lot less 3rd world and large areas of all of the nations are downright 2nd world now.  Africa's urbanization is BOOMING and that fertility rate of 5 children per woman....  Grid for BEV, Africa?  Are you kidding?

  BEV will not work for Central America or South America either as they neither have the solar(other than Mexico of course, but its Mexico), nor wind, let alone a stable enough grid to handle crappy power sources.   Argentina has wind/solar.... but this is Argen-freakin-tina we are talking about....  When you look up the word inept, there is no description, just a picture of the countries outline...

USA:  Driven be economics and BEV are not.  Europe: Also driven by economics, but they have no oil/NG, along with the fact they have a VERY high urbanization percentage and SHORT driving distances even if they DO want to go somewhere, so BEV in Europe, is the #1 Goal as it is tied to geopolitics.  Of course.... The electric GRID cannot handle it as they have already demonstrated with Germany's 75% solar capacity, but providing only 6% of their  energy "problem child".  So, even if they do go BEV, the power MUST come from somewhere and the only truly VIABLE option is Natural Gas, Nuclear, Coal, and Oil. 

No, peak demand will not happen in my lifetime.  Maybe my Grandchildrens lifetime.... Of course I don't have a grandkid yet...

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23 hours ago, D Coyne said:

As majors take over the tight oil production in the US, they may reduce completion rates to bring capital investment more in line with free cash flow, if they do so the current debt in the tight oil industry can be paid back and the industry may be profitable in the future, but much depends on future oil prices.  If the expansion of the BEV fleet continues at its current pace we may see oil prices peak in 2025 at $85/b and then decline, under that scenario tight oil may never become profitable.

Making it profitable would be incredible hard thing to do when cost of land and D&C could not be paid back in first three years while production declines by ~85%. Paying back debt or refinancing into increasing interest rates? Even tougher one. 

Shale will continue to play a big role as resource base is sizeable (far cry from heavy oil in Orinoco or Athabaska basins though) and it doesn’t take 7-10 years to bring it to the market but two things had to happen: debt write-off/consolidations/land revaluation (downside) and higher oil price to ensure payback in 2-3 years, without mockery of break-even prices which are based on inflated EURs and create accounting

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26 minutes ago, DanilKa said:

As majors take over the tight oil production in the US, they may reduce completion rates to bring capital investment more in line with free cash flow, if they do so the current debt in the tight oil industry can be paid back and the industry may be profitable in the future, but much depends on future oil prices.  If the expansion of the BEV fleet continues at its current pace we may see oil prices peak in 2025 at $85/b and then decline, under that scenario tight oil may never become profitable.

Dennis, regardless of how high you hope the price of oil gets, what XOM and CVX does, or does not do in the Permian Basin will have NO effect whatsoever on the massive amount of debt that independent public companies, and private companies, either amassed IN the Permian itself or drug with them TO the Permian FROM the Eagle Ford or Bakken plays.  If this statement of yours  is M&A related and include massive write downs of debt, where are those M&A's? I must have missed something. Your projections for growth, from free cash flow, at <$60 oil, AND total deleveraging are impossible. 

Rystad, however, I believe would absolutely love to have you come work for them. 

 

 

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On 3/22/2019 at 4:38 AM, JJCar said:

What's your point.  The Shale operators made tons of money from 2008 thru 2014. Most plowed the cash back into expanding their business . They issued bonds and took bank loans when borrowing was very inexpensive.  Then the bottom fell out of the pricing. 

Things change.  Shale industry matures.  Competition reduces product price.  Its Economics 101. OPEC price gauging is on its last leg.

As Art's  bio states, he consults to Capital Investment Funds and E & P Shale Companies. Rather than trying to artifically prop up prices by coordinating Shale companies to pull back production or in a sense demonstrate cartel like behavior, he should advise his clients as to what is happening in the US Shale Industry.

The Investment Firms which he recommended to buy certain Shale stocks should be advised to sell the weak sisters and buy the consolidators.

The E & P Shale Companies he has advised should be told (1) If you are too small, capital constrained or can't afford to implement multi-rig Pads, cube drilling and oilfeild digitization you should merge or sell out while you can. (2) If you are a large independent you should make sure you use the latest technology and methods to be able to make a good return on $45 to $55 oil.

Honestly, how do you organize all the numerous Shale Companies to simultaneously cut back production. The U.S. is a capitalist market driven economy.  Size now matters.  Cutting capital expenditures now to squeeze out a few dividends is not going to cut it for very long.

Art warns "  . . . . Last Chance".  Its already too late for that .

Sell weak ones  . . .  buy consolidators.

 

Emphasis mine. Presume by weak ones you mean independents...

Financial history does not always support that hypothesis. Notably if M&A is on the horizon. Doesnt look like Chevron/Exxon but Shell/Total might look to get on in the action. With oil prices moving up, there may be as much value (the beauty that lies in the eyes of the beholder) in independents that are willing to sell out - buyers almost always end up overpaying, especially when they are swimming with cash (which they are) and markets are valuing growth more than cash (which it is - Shell has 5%+ div yield - corp bond yields in Europe are lower).

Of course things are never simple - if there were 5-8 independents, this would have been easier - consolidators would then have no options but to get into potential bidding wars. The latter have more choice (what like 30-40 shale independents). But like I said, smart independents who are willing to sell out at the right time can create value for shareholders - consolidators may yet end up overpaying.

No good simple answer, admittedly.

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1 hour ago, JJCar said:

When I say weak ones I speak mostly of the small and midsize that thought $100 bbl oil was a bottom  . . . and was only going higher. They expanded and loaded up on debt.  The party is over.  Some of them have been hanging on because they want to believe " oil always goes back up to $80 or $90 bbl"   Until it doesn't.  Even some of the  larger independents took on too much debt.  Harry Hamm of Continental has btw $ 5 billion to $6 billion in debt.  They can't afford a dividend for their shareholders.

A few points on consolidation.  (1) The big boys aren't interested in aquiring small operators.  The ideal aquisition for them is $3 - 8$ billion. They will take a small acquisition if it abutts their contiguous property.  (2) Don't count out Chevron and Exxon.  Buyers do overpay.  I think BP's $10 billion buy of second rate shale properties from BHP was overpaying. Now most of the consolidators are smarter than that.  Exxon states heading to $15 bbl B/E.  Chevron says shale profitable today at $30 bbl and dropping.  Compare that to Harold Hamms Continental that has a cash flow B/E goal is between $45 to $50 bbl.  THE BIG BOYS WILL NOT OVERPAY TODAY  . . .  THEY KNOW THEY WILL BE ABLE TO BUY FOR LESS SOON. They are like vulgers circulating there prey waiting for there opportunitty.

My belief is many stressed small and midsize operators are heartened by todays $60 oil. This is false hope.  I think this is OPEC's last hurrah. Harold Hamm rencently stated that new infrastructure (as in pipelines and export terminals) will allow US producers to get prices  parody with Brent.  I AGREE WITH HARRY . . .  BUT WHERE WE DIFFER IS I THINK WITH AN ADDITIONAL 3 MILLION bbls OF US EXPORTS, BRENT WILL COME DOWN CLOSER TO WTI PRICING , NOT UP TO BRENT.

How are companies like Chevron, Exxon, Conoco and Oxy ( others) getting shale B/E at $20 bbl. There are several reasons.  The biggest differentiator is "data" .  There is historic data accumulated on over 1,000,000 + US wells already drilled.  New software, cloud computing and cross disiplined engineering teams (geologists, oil engineers, etc) put to use in real time has allowed them to achieve such redults. It is estimated that to set of a "manufacturing"  like pad with multiple rigs, hundreds of employees, cross disapline engineering team, that is fully digitized cost between $120 milion to $250 million per pad.  The small to midsize independents (and some large ones) can't afford that or don't have access to the data.

Some have suggested that operstors should pool data to increase the productivity fir all shale operators. But why would a data holder give data to a competitor when you can just wait them out .. .. ..  .. and buy them out a lower valuations. 

Why do you think shale operators like QEP and Endeavor have hired Investment Banks to shop them (with more to follow).  

Yes, in past some have paid too much . . .  but now people WANT to be bought out. There's a reason for that.  

I look back to a February interview with Chevron CEO Michael Wirth when he said with a big smile on his face, "Cut costs or die"

One question here. Some of the independent shale operators are older (in the shale biz) than exxon/chevron. Any reason why they dont have similar data as the majors. In terms of capital structure of course majors can get financing much cheaper, so all-in production costs would be lower. But what is driving usd10-20 differential in prod cost (assume like to like asset) - this is quite sizeable and I cant imagine fully explained by capital costs only. Well so really two questions...

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16 hours ago, Mike Shellman said:

Dennis, regardless of how high you hope the price of oil gets, what XOM and CVX does, or does not do in the Permian Basin will have NO effect whatsoever on the massive amount of debt that independent public companies, and private companies, either amassed IN the Permian itself or drug with them TO the Permian FROM the Eagle Ford or Bakken plays.  If this statement of yours  is M&A related and include massive write downs of debt, where are those M&A's? I must have missed something. Your projections for growth, from free cash flow, at <$60 oil, AND total deleveraging are impossible. 

Rystad, however, I believe would absolutely love to have you come work for them. 

 

 

Hi Mike,

I do not expect oil prices will be below $60/b at the refinery gate.  Majors are likely to pay about $5/b for transport cost so wellhead price would be $5/b less than refinery gate price.  Oil Price scenario is below, the "new price" assumes EVs ramp up quickly (and is likely too low an estimate for oil price), the EIA's AEO 2018 reference oil price case in 2017$ is shown for comparison. The vertical axis shows Brent Oil Price in 2017$.

oilprice1903.png

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(edited)

Mr. Shellman,

I agree that under $60/b in 2017$, there is no hope that tight oil companies can pay off debt. Using the new price scenario above I assume a $10 million well cost (2017$), royalties and taxes of 33% of wellhead revenue, $5/b transport cost. LOE of $2.3/b plus $15,000 per month (all $ values are constant 2017$), annual discount rate of 10%, and annual interest rate of 7.4%.  I also use an average 2017 Permian well EUR based on data from shale and assuming 15% annual terminal decline rates after an initial hyperbolic decline profile which starts to decrease in June 2024.  Note that I use actual Brent Oil Prices from 2010 to 2015 and after that oil prices are as shown in chart above, I also assume well cost was $10 million in 2017 $ from 2010-2015 which likely overestimates actual well cost over that period.  After 2019 well completions  are paid for from free cash flow and debt is paid off by 2028.  Cumulative net revenue is shown on left axis in billions of 2017$ and output in kb/d on right axis.  EUR is about 390 kb at breakeven price of $64.50/b, at that price the average 2017 well reaches payout at 64 months.  As always I do not know future oil prices and if they are lower than the "new price" scenario based on rapid increase in plugin vehicle sales, then oil output would be lower than the scenario below, my guess is that actual oil prices are likely to be higher than this scenario.  Earlier I suggested tight oil might never be profitable if Brent oil prices remain under 85/b in 2017 $, for some reason you changed this to $60/b, in any case it turns out I was wrong as scenario shown below shows (48 Gb ERR and about 130,000 total wells drilled).  I would agree that spending 1300 billion dollars to make 494 billion in cumulative revenue over a 40 year period is not a very profitable venture, only a 38% return over 40 years or about 0.8% per year for a real rate of return, with inflation added (assuming 2.5%/year) this would be a 3.3% annual ROI, money invested in the S&P500 would likely earn better returns with far less risk.

If that's the kind of analysis that Rystad would like, I would be happy to oblige, but they tend to be a bit more optimistic than me. :)

permian1903d.png

Edited by D Coyne

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13 hours ago, JJCar said:

1. I spoke of the data from 1million plus wells.  Most of those data points are from legacy conventional wells. 

2. The winners are those that can operate as " manufacturing" mode.  aFor example Continental Energy debates whether to ad or delete two rigs.  Companies like Chevron set up massive production pads that cost up to $250 million up front with hundreds of employees, engineering staff and logistics. They save on more eficient drilling, higher yields, shared sand, shared propent, shared water, etc, etc, etc in place locally . . .  all digitized with accurate resevoir and rock data and realtime data foe decision making.

Put simply it is Economics 101. 

The Big Oil  shale industry has figured it out.  Big oil was very late to the party.  They have now arrived.  They completely missed the initial shale revolution . . . just like OPEC did.  Big oil wasted HUNDREDS of BILLIONS on the Canadian tar sands.

Oil pricing power will continue for now.  Oil trades on short term rig count, inventory levels, Saudi production cut press releases and Trump sanctions.  They do look at demand but not to the extent as supply. A lot of these factors can and will change.  Its sll about timing.  

One thing that I contend is certain is Suppy is going Up faster than demand (even if the economy holds up) and not just US Shale (even though US is leading for next few years).  OPEC wants US to cooperate with cartel price fixing.  You never know with Trump.  He has a lot of pro oil company people in his administration plus best friend Continental Oil  CEO Harry Hamm.  But what he wants more than taking care of his friends and potential 2020 donners. He wants (1) Iran capitulation on nukes (2) be the arbitrator of Israeli/Palistine peace accord.  He won't get either without the help of Suni Arabs, whom make up a majority of OPEC (Including Saudi Arabia).

Shale consolidation has started.  I don't know the timing but I suspect M&A , bankruptcy go in full force sometime 2020 after increased US oil exports start.

If this plays out another problem will be the High Yield market.  Lot of Shale Oil in High Yield.

>> Put simply it is Economics 101. 

Dont we all wish it was that simple. Then community.oilprice.com could shut down and we could all go home.

Had looked at Pioneer 2018 data, but then looked at Continental as well. Each of them is spending US$3bn annually in terms of capex. Surely US$250mn cap spend is not out of the ballpark for them from a spending perspective (around 8% of annual capex). Now I must admit here that I am not from the oil industry (screams NEWBIE!). But being from the financing/investments business, keep trying to figure out from smart people such as yourself what is going on in the world. One of the smart people I tapped is a friend who worked in oil services business (Schlumberger) and these contractors also bring in a lot of value-add in terms of data/technology. Of course my friend never worked in US shale but he did in Middle East conventional oil business (onshore/offshore).

So I hope you will understand my skepticism - why should there be such a large (US$10-20) diff in all-in costs.

Scale could be part of the answer but there is little differential btw Chevron/Pioneer/Continental yet - all of them are around 0.3mbd in Shale (acreage may be in diff places). And I am not sure how much synergy can be there between Gulf of Mexico and Shale ops.

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18 hours ago, AcK said:

One question here. Some of the independent shale operators are older (in the shale biz) than exxon/chevron. Any reason why they dont have similar data as the majors. In terms of capital structure of course majors can get financing much cheaper, so all-in production costs would be lower. But what is driving usd10-20 differential in prod cost (assume like to like asset) - this is quite sizeable and I cant imagine fully explained by capital costs only. Well so really two questions...

Although related to financing / financial stabillity - I think a big factor production culture. Majors MO is to develop a plan and then execute. A few years for them to plan a field development for them is nothing. Generally I think that is what Shale needs : to be turned into a manufacturing process where there is a slow and steady decline of costs. 

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