Is Shale a 'Quick Fix' for Decreasing Asset Value for the Big Players?

[Douglas Buckland + 6,308]

First, let me preface this post by once again admitting that I am NOT a 'financial guy' and that I'll probably get some terms wrong. That said, you should be able to get the gist of what I am trying to say. Secondly, I could not find an international rig count breakdown of rigs solely engaged in exploration drilling by years, so I am making an assumption as to recent exploration activity.

Assuming that exploration drilling has been in the doldrums for the past five years or so, I would conclude that the international oil companies are not replacing the barrels of oil which they are selling, at the rate they are selling them. If this is true, then the actual value of the company would be decreasing over time. At some point, the shareholders are going to become antsy. 

I think that we can all agree that demand for oil is still increasing, even if the rate of increase is not as great as a few years ago. That said, the international oil companies will continue to sell the company assets (oil) to whoever is willing to pay the going price. If China and the US come to an agreement over trade, I would expect demand to increase over time, which further exasperates the situation.

Making the further assumption that there are rational adults sitting in the Ivory Tower headquarters of each multinational oil company and that he or she would like to hold onto the job for as long as possible, they must be aware of the negative replacement rate of the barrels which they are selling.

As exploration drilling seems to be, relatively speaking, dead in the water (or on land), these rational adults will be looking where to spend their exploration dollars to get the biggest bang for their buck, as quickly as possible. Offshore exploration is an incredibly expensive gamble with no guarantee of returns. Even if you hit an elephant field, it will take years and a lot of cash to get it to a refinery.

Onshore exploration drilling, although much less expensive with a shorter time to market, is still a gamble. Furthermore, many of the best places to drill onshore exploration wells are in areas where political stability is not really stable. With visions of Venezuela, Libya, Algeria and recently Iraq dancing in their heads, they likely are not chomping at the bit to begin an onshore drilling campaign, yet.

Granted, development drilling and producing fields play a part and are keeping the stock tanks full at the moment, but eventually, the Big Players will need to address their declining portfolio.

Now we see the Big Players moving into the Permian Basin and other shale plays. Why is that? Perhaps it has nothing to do with the longevity of the play or actually believing they can make money at it in the long run (nobody else to date has), perhaps it is in an effort to replace barrels as quickly as possible for a couple of years. They are aware of the spectacular decline curves of these wells, but if they can take advantage of the initial production rates for a couple of years while looking like they are addressing the 'depletion of asset' issue, the 'rational adults' can appease the shareholders and hold onto their jobs for a while longer.

I am just throwing this scenario out for comment as, for the life of me, I can't understand why the Big Players would dive into the Permian Money Pit.

 

[wrs + 893]

Something that gets missed in the analysis of cost of production is value of reserves and those are quite high in the Permian.  The IPs are large and the EURs continue to rise on these wells.  A 4400ft lateral in Wolfcamp A has at least 350kbbl of recoverable reserves in the first 5 years.  A single section can conservatively support at least 8 of these wells in Wolfcamp A and maybe up to 16.   Consider that Wolfcamp B, D and Bone Springs may have similar profiles and you could claim a large amount of reserves without having to drill very much at all.  Reserves are of course valued according to the current oil price but considering how much they cost to add by exploration, buying them in the Permian may be a lot cheaper than exploration.

Edited May 16, 2019 by wrs