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Shale profitability

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Over the past few months there have been numerous articles predicting the impending decline of shale production mostly related to profitability. When I looked at EOG however the financials seem to tell a different story, huge cash flow, low debt and very profitable. Are they an exception? Are they an example of shale done right? 

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Excellent thread, thank you for starting it, I’m very interested to see the views from all sides, the forum needed a tangent point. 👏👏👏

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I've seen a couple analysts on BNN talking about U.S. shale. One was saying it was that shale companies drilled their best rocks first, which had much higher yields than their 2nd tier rocks.  Soon they are going to have to be switch to their 2nd tier rocks according to him. He also said there is a big difference between rate of growth decelerating vs being able to grow production.

I have also read that investors have not seen the returns they have been wanting to see yet, they want some money back through dividends or share buybacks instead of companies drilling more wells.

https://www.bnnbloomberg.ca/investing/video/eric-nuttall-discusses-the-growth-of-u-s-shale~1768153

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I definitely don’t pretend to understand the ins and outs of how the shale companies conduct business. All I know is it has been very profitable for my family dating back to 2007.

We have royalties from several different companies and they keep placing new wells on line every year. Just finished the latest rounds of talks with our largest major and have 12 more wells planned over the next 18 months or so. These are double laterals which would have been 24 wells back in the beginning of the shale play in south Texas.

 I find it hard to believe they would be spending all this time and money on new wells if they didn’t think they would see a profit.

Either way I hope they keep drilling and sending the royalty payments for many years to come.

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1 hour ago, butasha said:

I definitely don’t pretend to understand the ins and outs of how the shale companies conduct business. All I know is it has been very profitable for my family dating back to 2007.

Good for you and your family. I hope you continue to prosper and that when the the wells are played out that the property will be returned to its previous state.

I've read that the decline rate for fracked wells is very high. Some numbers are as high as 50% to 60% per year. Can you tell based on your royalty payments and on a per well basis, if that is your case?

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Granted there have been more than a few companies that have taken on too much debt and have gone bankrupt but I would think that’s a management issue and not a shale problem. Generally the articles and comments on this site have implied that it’s a shale problem. I don’t want to start hunting up those articles but typical are comments such as; most companies have negative cash flow, shale companies have burned thru billions of investor money with nothing to show for it, they r an elaborate Ponzi scheme etc. I think it was Hamm who said that shale companies were drilling themselves into oblivion? Many anti shale commentaries point out the decline rates but the high initial production isn’t bad if the total yields aren’t all that different as it allows the companies to get paid quicker. I know about the consternation over tier 2 sites but honestly I’ve been hearing that for years and it has yet to materialize. 

While some articles have suggested the rate of improvement in  productivity Is slowing down that again doesn’t mean that current approaches to shale are unprofitable or that productivity won’t continue to improve in the future. 

To all those shale bashers out there how would u explain EOG? It seems shale is crazily profitable if done properly. Is the so called problem simply poorly managed companies?

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If they were not allowed to flare natural gas, excessively, they could see more profit in the long run. More importantly, they would be preserving a natural resource that we will need in the future. I am looking forward to the larger companies taking over the business myself. I hate to say that, but the capital is necessary to do the job the right way. 

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Art Berman is a consulting geologist that has been saying for years that shale plays are NOT making money and it can be proved by analyzing the operator's required SEC financial reports. Now, such analysis takes expertise to do it properly. He's written many papers, made many speeches, does regular blog reports and videos. He has long touted EOG as about as good as it gets. EOG has good rock. They also did not pay huge, crazy high sums of money for their leases.

As for a comment above inferring that companies would not be drilling if it were not profitable, that seems like a proper way to look at it but it's actually hugely flawed thinking. The reason why is because the oil business is nothing like it was prior to shale. Now, it's all very large companies, most multi-billion companies, and they have all been infused with humongous amounts of capital because Wall Street felt they had nowhere to go to get a decent return in an economy based on stimulus and ZIRP. Operators tooted their horn about how great their wells are and capital markets bought into it and it's just crazy how much money has been thrown at shale. So, when you get x-billion dollars to spend on drilling, you drill. Even if it's not profitable. Because you have contracts. That make you drill. This has been a huge stumbling block to get people to realize. Yes, there are good spots, but the MAJORITY of shale rock is not profitable. Overall... has it worked? You can't just count the great 10% to 20% of a play that's good and not count all of those crappy wells you drilled to find the core.

Art Berman also points out the fact that these companies 'pencil whip' the public via their presentations, not counting all of their 'all in' expenses. Without a doubt, some of these companies have bordered on fraud with pie-in-the-sky presentations about how profitable their wells are. Believe it... companies do not 'fully tell the truth.' They leave out a lot. Always tooting their horns about how great everything is! You gotta dig for truth.

I dunno... maybe it IS only the majors who can make shale work long-term. But I do know they are definitely running out of plays. There just are not that many places to find reserves, easy stuff is gone. If they do NOT make shale plays work and if oil/gas continue to provide the bulk of energy, oil/gas prices will go up a lot. Which tends to cause major economic recessions. It's a big mess this world is in! But then we have renewables on the rise, so, who the heck knows what the future will unfold. As for me, my gut is that renewables are going to capture significant market share sooner than most believe.

Lastly, a biggie for shale wells is how fast to payout, because the decline is steep. If they can pay out in less than one year, that is fantastic. Two years is still terrific. But most do not!

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All the comments above pretty well jive with my limited knowledge but I guess I still trust science to do what it always has done: find a better solution. For example, carbon dioxide injection down the well-bore has been great, as has injection of methane and ethane gas. Chevron and Exxon are all over the Vaca Meurto, which has shale layers twice as thick as the Permian and is over-pressurized doubly too. There's a kid at Texas A&M who has apparently discovered a way to get to almost carbon-neutral. Importantly, when a well gets to end of life, it turns into a salty dog, pulling in water, but at the bottom several of these are rich in lithium. In a perfect world, renewables and hydrocarbons go hand in hand. In a competitive world, it's going to be tougher. In a perfect world, we wouldn't subsidize electric vehicles to the tune of $7500 per vehicle--Henry Ford didn't need governmental subsidies to make his mark. Not to argue, but we're going to improve the way we handle fossil fuels. The gentleman above who said he was waiting for the day the majors took over has a point: Chevron and Exxon have both tried hard to get the EPA to rein in feckless flaring of natural gas, which is nothing more than the release of methane into the atmosphere. Put the methane back down the hole. Wait to hook onto a pipeline. We were more or less pushed into shale because we were told on a daily basis that we were running out of natural gas. I recall back in the eighties when Reagan told the drillers to go for it, and to nudge that along he basically made sure that any NG brought up from deeper than 10,000 feet received a bonus. Elk City, Oklahoma erected a sign, "Natural Gas Capital of the World," or something like that. The Parker Brothers built a rig called Big Bertha that was said to be capable of going 50,000 feet down. It never drilled a hole. The deepest one at that point was one in Beckham County: 29,000 and change. It caved in. There's a transition going on: We now have NG being flared. I don't know. It's going to be interesting to watch. It's true that we're rapidly depleting spacings for Tier-1 rock, that we'll have to move on to the next level, but it's also true that Mr. Berman, for all his many talents, has never been a fan of shale. Wall Street threw money at shale. They're not doing that anymore. In fact, $127 billion in junk bonds start maturing in the next two years. If oil prices don't rise, we're going to see a meltdown in small drillers. But then, unless deepwater goes crazy, or renewables do, or both, we're going to see skyrocketing oil prices. Such is the nature of the energy business. Anyway, this was certainly a thoughtful thread that this "tootired" chap started, and I've enjoyed all the studied comments above. I'm old but still learning and I've certainly learned a lot from all you people. 

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Re Art Bergman: Ya and there are engineers who are out there who say that the twin towers was a controlled detonation, scientists who prove the moon landing never happened, PHD’s who claim that climate change doesn’t exist etc. What they all tend to have in common is a greater knowledge of the topic in question than the cohort they are trying to convince, the belief/agenda that an event occurred a specific way, and use their ‘expertise/advanced education’ to try and convince NON-EXPERTS of their beliefs. (Funny a common theme of those types of arguments is also trying to convince the non expert he’s being played). Just because there is a minority expert opinion that disagrees with the mainstream doesn’t mean that opinion is right. 

How do u know they r running out of plays? Haven’t we been hearing that since 2016? Is there anything material to indicate that the argument is true? What I see is that EOG seems to have far less relative debt than conventional oil companies yet they keep increasing production. I see majors putting a greater proportion of their capital in shale, why is that? BTW saying because they are stupid and like to lose money is not a good answer yet I hear it all the time! 

It seems that there is a group pushing the concept that shale is not profitable using theoretical arguments and pointing to failing (poorly managed?) companies. I used to buy that argument but it doesn’t address the issue of why some shale companies like EOG are so profitable even at these depressed prices.

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2 hours ago, Danlxyz said:

I've read that the decline rate for fracked wells is very high. Some numbers are as high as 50% to 60% per year. Can you tell based on your royalty payments and on a per well basis, if that is your case?

First chart is a single well that holds a specific lease that we have that was refracked in 2017. While this well doesn't look like a barn burner I picked it because it was refracked within the last couple years. It is important to note that this one specific well and is a short lateral and still has produced 329,737 barrels of oil and 806,771 mcf of gas/ngl during this time frame. 

image.png.f34a6f85a250121e998767d1846a1abc.png

The second graph is 4 wells drilled, fracked and placed into service as one package. This lease and I assume that meant all 4 wells were refracked back in 2015-16 time frame. This lease is approximately 1.5-2 miles from the well of the first lease and would be considered short lateral leases. The second lease as of July 2019 has produced 1,735,670 barrels of oil and 4,010,245 mcf. image.png.3c319e5dd521ea7ee54598a016170a7a.png

All this information is available via the Texas Railroad Commission web site. I can get a bit more granular by logging into a service provided by a third party but due to the nature of the world we live in today prefer to not provide any more information than this. This information only looks at data from 2 leases in the Eagle Ford play and definitely not enough information to define the entire play but does support the fast decline rate of the IP as well as the fast decline of the refrak. While there is definitely a fast decline rate on these wells a return of 1,735,670 barrels of oil and 4,010,245 mcf and still producing approx 10k barrels a month after 7 years seams like a pretty good money maker to me!

Now if I wanted to be negative I could dig around on the RRC site and find a few examples that would show leases with huge losses. On the other hand I can go a little further North East of the wells represented in these 2 graphs and the numbers will blow your mind. I just picked a couple wells no one appears to talk about. Everyone wants to talk about the monster wells or the complete dogs.

When looking at these 2 graphs it is important to understand that the wells in these graphs are some of the first wells drilled in this area and the completion process that was used on these wells and what is used today is completely different. These 2 graphs represent 2 individual leases a couple miles apart. The first lease (graph) has one well and the second lease (graph) has 4 wells. The major that holds these leases have notified us that they plan on having a minimum of 8 wells and a possibility of 12 wells on each of our leases for the Eagle Ford play. The are currently testing and have had very encouraging results in the Austin Chalk play and will probably be drilling wells for these as well.

If the major drills 12 wells per lease and WAG of 4 (maybe more) Austin Chalk then there are many, many years of drilling left in South Texas. Just my uneducated royalty owners view of the oil patch in South Texas.  

 

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EOG, which I would bet most people would say is the #1 shale operator had a stock price of $131 less than one year ago. Today, it's $81. If they are so profitable, why don't investors agree?

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(edited)

22 minutes ago, butasha said:

First chart is a single well that holds a specific lease that we have that was refracked in 2017. While this well doesn't look like a barn burner I picked it because it was refracked within the last couple years. It is important to note that this one specific well and is a short lateral and still has produced 329,737 barrels of oil and 806,771 mcf of gas/ngl during this time frame. 

image.png.f34a6f85a250121e998767d1846a1abc.png

The second graph is 4 wells drilled, fracked and placed into service as one package. This lease and I assume that meant all 4 wells were refracked back in 2015-16 time frame. This lease is approximately 1.5-2 miles from the well of the first lease and would be considered short lateral leases. The second lease as of July 2019 has produced 1,735,670 barrels of oil and 4,010,245 mcf. image.png.3c319e5dd521ea7ee54598a016170a7a.png

All this information is available via the Texas Railroad Commission web site. I can get a bit more granular by logging into a service provided by a third party but due to the nature of the world we live in today prefer to not provide any more information than this. This information only looks at data from 2 leases in the Eagle Ford play and definitely not enough information to define the entire play but does support the fast decline rate of the IP as well as the fast decline of the refrak. While there is definitely a fast decline rate on these wells a return of 1,735,670 barrels of oil and 4,010,245 mcf and still producing approx 10k barrels a month after 7 years seams like a pretty good money maker to me!

Now if I wanted to be negative I could dig around on the RRC site and find a few examples that would show leases with huge losses. On the other hand I can go a little further North East of the wells represented in these 2 graphs and the numbers will blow your mind. I just picked a couple wells no one appears to talk about. Everyone wants to talk about the monster wells or the complete dogs.

When looking at these 2 graphs it is important to understand that the wells in these graphs are some of the first wells drilled in this area and the completion process that was used on these wells and what is used today is completely different. These 2 graphs represent 2 individual leases a couple miles apart. The first lease (graph) has one well and the second lease (graph) has 4 wells. The major that holds these leases have notified us that they plan on having a minimum of 8 wells and a possibility of 12 wells on each of our leases for the Eagle Ford play. The are currently testing and have had very encouraging results in the Austin Chalk play and will probably be drilling wells for these as well.

If the major drills 12 wells per lease and WAG of 4 (maybe more) Austin Chalk then there are many, many years of drilling left in South Texas. Just my uneducated royalty owners view of the oil patch in South Texas.  

 

If they were to go bankrupt who is responsible for cleaning up the wells on your land?

https://www.macleans.ca/news/canada/bankrupt-oil-companies-are-saddling-alberta-landowners-with-orphan-wells/

I know in Alberta there have been oil companies that have gone bankrupt in recent years, leaving their orphaned wells abandoned which have apparently caused health issues for land owners.

Don't get me wrong, if I owned land and could make good money by allowing oil companies to drill on it I would too.

Edited by PINGFan

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9 minutes ago, PINGFan said:

If they were to go bankrupt who is responsible for cleaning up the wells on your land?

https://www.macleans.ca/news/canada/bankrupt-oil-companies-are-saddling-alberta-landowners-with-orphan-wells/

I know in Alberta there have been oil companies that have gone bankrupt in recent years, leaving their orphaned wells abandoned which have apparently caused health issues for land owners.

 

Hopefully the copy and paste and associated link below will provide the information that you are looking for.

https://www.rrc.state.tx.us/oil-gas/environmental-cleanup-programs/state-managed-plugging/

State Managed Plugging

Although most oil and gas wells that are no longer productive are plugged by the responsible operators, the Railroad Commission administers a program to plug abandoned oil and gas wells.  Learn more about this program below.  

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20 minutes ago, butasha said:

Hopefully the copy and paste and associated link below will provide the information that you are looking for.

https://www.rrc.state.tx.us/oil-gas/environmental-cleanup-programs/state-managed-plugging/

State Managed Plugging

Although most oil and gas wells that are no longer productive are plugged by the responsible operators, the Railroad Commission administers a program to plug abandoned oil and gas wells.  Learn more about this program below.  

Thanks.

Ok, at least they have a clean up program in place to protect you.  That is a good thing.

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3 minutes ago, PINGFan said:

Thanks.

Ok, at least they have a clean up program in place to protect you.  That is a good thing.

We receive royalties from several different companies but when we decided on the royalty portion that we have surface ownership we picked a major instead of one of the smaller companies. We didnt want to be resold or have to worry about the company going out of business in the future. Doesnt mean it wont happen but we do what we can.

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1 hour ago, butasha said:

First chart is a single well that holds a specific lease that we have that was refracked in 2017. While this well doesn't look like a barn burner I picked it because it was refracked within the last couple years. It is important to note that this one specific well and is a short lateral and still has produced 329,737 barrels of oil and 806,771 mcf of gas/ngl during this time frame. 

image.png.f34a6f85a250121e998767d1846a1abc.png

The second graph is 4 wells drilled, fracked and placed into service as one package. This lease and I assume that meant all 4 wells were refracked back in 2015-16 time frame. This lease is approximately 1.5-2 miles from the well of the first lease and would be considered short lateral leases. The second lease as of July 2019 has produced 1,735,670 barrels of oil and 4,010,245 mcf. image.png.3c319e5dd521ea7ee54598a016170a7a.png

All this information is available via the Texas Railroad Commission web site.

butasha, 

Thanks for taking the time and effort to make these graphs. It looks like when you start out with IP of +20,000 for one well or +65,000 for 4 wells a decline rate of +50% is something you can live with.

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1 hour ago, BillKidd said:

EOG, which I would bet most people would say is the #1 shale operator had a stock price of $131 less than one year ago. Today, it's $81. If they are so profitable, why don't investors agree?

I'm not the apologist here but when shale drilling was just getting kicked off, everyone thought they could go with tight spacing and therefore had to overpay for a lot of minerals. EOG bought some properties early, but even that price was a factor when you consider that spacings have had to be widened out because of parent-child production issues. But your point is well taken: I don't believe that EOG has been wildly profitable, just ahead of most of the pack and the sentiment out there is just terrible--$127 billion of junk bonds is in jeopardy. The people who have made out the most are like Butasha, who had the minerals in their family trees and then were smart enough to rehab some old wells. Some of those old ones were completed with primitive ten-stage frack jobs not using much sand and were still great wells, but now with better completion techniques are turning into barn-burners. I mean, like Butasha said, there are just some astounding success stories out there with refracks. I readily acknowledge that for the industry as a whole, this shale thing may turn out to be a laugh. Right now, I still contend that were it not for shale the United States would be paying $100-$200 for oil because of this Abqaiq raid, so it's looking better by the day. 

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6 hours ago, Danlxyz said:

I've read that the decline rate for fracked wells is very high. Some numbers are as high as 50% to 60% per year.

Production data is US is reported and publicly available, check for yourself. @shaleprofile Is a good resource https://shaleprofile.com/

50% a year is common; it starts with even higher decline but flattens somewhat (still double digits)

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2 hours ago, BillKidd said:

EOG, which I would bet most people would say is the #1 shale operator had a stock price of $131 less than one year ago. Today, it's $81. If they are so profitable, why don't investors agree?

Profitability and share price are correlated but they are not the same thing. Share price is about the collective opinion of the future value of the company. U can have unprofitable companies with very high valuations such as amazon/Netflix in the past, beyond meat more recently. EOG is clearly profitable, all u have to do is check out the numbers. There are many reasons why a companies share price can take a hit. Generally for a profitable company, what it comes down to is that for whatever reasons investors are no longer willing to pay so high an earnings multiple for the companies shares. Whether or not EOG is good value at its current price is not the point. I don’t own EOG and I’m not looking to own it.

What I’m interested in is why all the literature implies that shale is such a bad investment relative to conventional drilling. EOG is clearly very profitable and additionally  over the years there have been several anecdotal examples such as the one earlier in this thread that implies these wells are very profitable. Why all the frac bashing? Are these articles (which do make sense while you’re reading them) taking horror stories of poorly managed companies and applying that to all shale companies? Are these articles fake news? 

Since I’m naive a newbie don’t know much about the topic etc I’m looking for a coherent argument answering the question; if shale drilling at current prices is a money loser how do u explain EOG?

 

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3 hours ago, BillKidd said:

EOG, which I would bet most people would say is the #1 shale operator had a stock price of $131 less than one year ago. Today, it's $81. If they are so profitable, why don't investors agree?

Because stock price is more about feelings, than reality for most people "investing".  << Cough >> rank speculation AKA GAMBLING

Take Ilumina(ILMN) which I own as an example.  They record profit every quarter, new dominating products, and the stock price drops like a rock.  WHY?  Because some gambling dufus in some ivory tower who has a position of influence stated profit at 2X actual....  Of course no dividends are given out and most profit is turned into R&D and acquisition of IP strengthening their position which long term makes their business STRONGER, but you know, some ivory tower weenie said......  Maybe he had a massive short on the stock and was using influence.  It has happened for this stock MANY times.  Makes one wonder....   

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EOG is among better shale operators but that’s a tough low margins business at current oil prices. 

Free cash flow is a useful indicator in shale. Normally you would understand company may be negative FCF during growth (drilling and completion) phase except rapid decline in shale mean such growth has to be financed by production because past ~3 years residual rates will barely pay to keep the lights on. 

Here is one of staunch critics of shale, Steve St. Angelo: https://srsroccoreport.com/the-shale-oil-ponzi-scheme-explained-how-lousy-shale-economics-will-pull-down-the-u-s-economy/

His critique is based on low Energy Return on Energy Invested although thermodynamics paper he cited fails to recognise energy storage utility of oil (makes it best transport fuel)

Art Berman and @Mike Shellman aren’t holding any punches on shale either. Mike’s blog oilystuffblog is a very entertaining read, 

Lately EOG turned positive FCF - good development. 

https://ycharts.com/companies/EOG/free_cash_flow

I didn’t check whether they financed by debt issuance (can become costly if downgraded) or equity dilution. 

People who benefit most from shale activity (other than management of course) are the land owners and speculators. Definitely not service companies, that I can assure you of

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Danilka, Thanks for the information about the Mike Shellman blog. I am basically a lurker compared to many here but find it surprising that I didn't know about his blog.

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1 hour ago, Gerry Maddoux said:

But your point is well taken: I don't believe that EOG has been wildly profitable, just ahead of most of the pack 

Check out the past quarter; positive cash flow, pos earnings and low debt. Last quarter net earnings $850 mil, cash flow 2.7 bil, long term debt down to 4.1 bil after paying off 900 million since Jan. Looks like they are doing all right to me.

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