Firm Oil/Gas Stats Hard to Come By – But Some Shale Drilling Makes Little Sense
By: Tim McPartland,
We have continued to dig through statistics on oil and gas well drilling as well as cost and production data on a daily basis searching for information that may help us make a firm investment commitment in the energy arena–but as many of you know the ability to latch on to super firm information on a timely basis is near impossible.
We wanted to know some basic information, because it seems that there are some basic economic questions that need to be answered. What is the cost to drill a typical shale hortizontal well? This is the easiest question we have to answer and information is available in many places. We find that $7 to $13 million would be pretty typical in the Bakken. Obviously this is not a revelation to many and can be verified in many locations. What is nearly impossible to find with any great degree of confidence is what is the EUR (Estimated Ultimate Recovery) of a given well? My thoughts here are simple—if a well costs $10 million to drill (for instance) and then it costs anywhere from $5-$15/Barrel to produce from this well once it is completed does it even make sense to spud any new wells? This is a question to be answered in particular in the Bakken where we have trouble making a case for drilling much more at all at this time with these low crude prices and lousy North Dakota midstream support.
In the Bakken we find EUR estimates all over the board–with most data is coming from company CEO’s (in our mind that makes these numbers highly suspect). Some have claimed EUR’s of over 1 million barrels, while others claim 400,000 and others 300,000. It is clear that if there are wells with EUR’s of over 1 million barrels they are clearly profitable at prices even down to $20-$25/barrel. On the other hand a more believable number of 300,000 barrels EUR gives you just marginal profitability. One must remember that prices at the wellhead in North Dakota trade a fair amount below oil coming from Texas. Early in December Bakken crude was trading around $10-$13/barrel below the Eagle Ford because of the transportation challenges presented in North Dakota (lack of pipelines etc). Certainly this cuts into already thin margins. Our best guess is that at $55 crude most North Dakota frackers are losers. We note that on 12/23/2014 Continental Resources again cut 2015 Capex–this time down to $2.7 billion from $4.6 billion. There is super good discussion and information on the Bakken at Million Dollar Way – a blog on the Bakken.
In the Eagle Ford in Texas we find some very interesting information. For instance there are wells that have recently been drilled on the fringes of the Eagle Ford in Texas that are producing with a EUR of 25,000 barrels–obviously this is just one tiny step above a ‘dry hole’. At $100/barrel these wells will generate just $2.5 million worth of revenue over their life–yet the wells cost up to $6-8 million to drill and complete. Then on top of this it will cost $5-$15/barrel to produce oil. Certainly this is not the normal situation, but shows the extreme on the lower end of the frac plays.
As of the most recent estimates available Eagle Ford wells have an average of 168,000 barrels of EUR. Applying todays closing price of $55/barrel on WTI you come up with a total revenue stream of $9.2 million–on a well that likely cost $6-$8 million to drill. Now subtract $8/barrel cost to produce the crude after the well is completed and you have a net revenue stream of $7.9 million—so what you have on average is a bunch of break even producers.
Looking further at the Permian in Texas/New Mexico we find what appears to be the most reliable producing area in the U.S. for the shale drillers. The EUR ranges from 400,000 to 1,000,000 barrels and the drilling and completion costs are much lower than in the Bakken. Drilling and completing a well is as low as $5 million for some players so coupled with the high EUR’s major players should be able to hang in there quite easily. Additionally there is little penalty in transportation as they are very near Cushing, OK so very little penalty accrues for those selling at the wellhead. We also find that the shale layer is so thick in the Permian that hortizontal laterals can be layered on top of each other – this obviously gives some economy of scale and provides almost endless possibilities for drilling (I am sure many you already knew this, but with all our reading we learn new things everyday that we didn’t know-and this is one of them). It is obvious to us that the Permian is where one would like to be involved if one is to choose between the Bakken, Eagle Ford and the Permian when crude oil is at $55.
So as we have stepped through the 3 ‘plays’ above and have determined in our minds that the Permian is the place to search further we need to search for a company that is involved there that will pay us a healthy distribution while we wait. We intend to search through the MLP’s to find some of the better positioned companies involved in the Permian and consider them for purchase.
We will be writing more on our thoughts in the oil and gas arena as we hope to hone in on a bargain sometime soon.