tight oil money return on investment eagle ford shale case ... · dvn 2014 oil gas max 30,000...
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Slide1LabyrinthConsultingServices,Inc. artberman.com
Tight Oil Money Return on Investment Eagle Ford Shale Case History
Art Berman Labyrinth Consulting Services, Inc.
American Chemical Society New Orleans, LA March 21, 2018
Slide2LabyrinthConsultingServices,Inc. artberman.com
TheEagleFordShalePlay
• LocatedinSouthTexasbetweenSanAntonioandCorpusChristi.• Horizontaldrillingandhydraulicfracturingbeganin2008.• Approximately17,000producingwells.• Februaryproductionwas935,000bo/d,downfrom1,324,000inDecember2014.• 71activehorizontalrigs.• Anover-saturatedsolutiongasdrivemechanismwithaminorstructuralcomponent.• Productionisvolatileoilandcondensate.• 88%oftheoilis>40APIgravityand32%is>50APIgravity.
Corpus Christi
HoustonSan Antonio
EAGLE FORDSHALE PLAY
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Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 IncrementalProductionSinceApril2015(mmb/d)
U.S.OilFutureisaBetOnaSinglePlayPermianBasinistheOnlyTightOilPlayProducingMoreOilThantheApril2015
PeakFollowingtheOIl-PriceCollapse
Source:EIA&LabyrinthConsultingServices,Inc.
EagleFord
Bakken
AnadarkoNiobrara
Permian
EagleFord
Bakken
Base
2015PreviousPeak
Production
AnadarkoNiobrara
Slide3LabyrinthConsultingServices,Inc. artberman.com
EagleFordWellPerformanceEvaluationbyDecline-CurveAnalysis
100
1,000
10,000
100,000
1 10 100
Rate,bblsorM
scf/mon
thTimemonths
LogLogPlotRatevsTime
Points=ActualDataLine=ForecastOil=Green,Gas=Red
100
1,000
10,000
100,000
0 5 10 15 20 25 30 35 40 45 50 55 60
Mon
thlyRate,bblso
rMscf
MonthsfromFirstProduction
Semi-LogPlotofRatevs.Time
Points=ActualDataLine=Forecast
Oil=Green,Gas=Red
EOG 2013OIL GAS
Max 57,000 53,000b 1.25 1.30
Di 20.00 12.00EUR 401,691 295,699
100
1,000
10,000
100,000
1 10 100
Rate,bblsorM
scf/mon
th
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LogLogPlotRatevsTime
Points=ActualDataLine=ForecastOil=Green,Gas=Red
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1,000
10,000
100,000
0 5 10 15 20 25 30 35 40 45 50 55 60
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thlyRate,bblso
rMscf
MonthsfromFirstProduction
Semi-LogPlotofRatevs.Time
Points=ActualDataLine=Forecast
Oil=Green,Gas=Red
DVN 2014OIL GAS
Max 30,000 70,000b 0.475 0.45
Di 1.80 1.20EUR 370,863 1,100,892
• Top6EagleFordoperatorswereevaluated:Chesapeake,ConocoPhillips,Devon,EOG,Marathon,&Sanchez.
• Standardratevstimedecline-curveanalysiswasusedtomatchproductionanddetermineEUR(estimatedultimaterecovery).
• Productionwasnormalizedandvintaged byyearoffirstproduction.• Groupdecline-curveanalysisbyoperator&vintaged yearoffirstproductionfrom2013-2016.• Matchesweregoodtoexcellentformostoperatorsandvintage-yeargroups.• 2017wasproblematicasexpectedbecauseofshortproductionhistory.• Standardsemi-logplotswereusedinconjunctionwithlog-logplotstocalibrateb-exponentsfor
hyperbolicdecline.• OilandgasstreamsweredeclinedseparatelyandlaterintegratedthroughBOE(barrelofoil
equivalent)conversion.
Slide4LabyrinthConsultingServices,Inc. artberman.com
IntegratingOil,NaturalGas&NaturalGasLiquids(NGL)Production
• Thestandardconversionofnaturalgas-to-barrelsofoilequivalentis6:1basedonenergycontent.• Avaluerelationshipofoil&gasismoreusefulforeconomicanalysis:
Ø $60(oilspot)/$2.75(gasspot)=22.• NGL(naturalgasliquids)productionisnotreportedtotheTexasRailroadCommissionbutannual
dataisavailablein10-KannualfilingsforcompaniesthatarepureEagleFordplayers.• Anaveragevalueof80barrelspermillioncubicfeetofgaswasused:
Ø 80BPMat42%ofoilvalue.Ø 0.08x(0.42*$60)=$2.02uplift/mcf gas.
• Gasshrinkageof86%:$2.75*0.86=$2.37/mcf.• NGL+Gas:$2.02+$2.37=$4.38/mcf.• BOEconversion:$60/$4.38=14mcf/BOE.• EagleFordwellheadpriceis~$2.20lessthanWTI.• Sanchez’s—theonlypureEagleFordplayerevaluated—2017realizedpricewas$48.60&2017
averageWTIspotpricewas$50.88.
Slide5LabyrinthConsultingServices,Inc. artberman.com
ApplyingEURtoAllWells
• EURfromdecline-curveanalysiswascorrelatedwith12-monthcumulativeproduction.• Theresultingconversionof2.36*12-monthcumulativewasappliedtoallwellswithatleast12
monthsofproduction.• TheresultingEURmaprevealed2coreareasinthenortheasternandsouthwesternpartsoftheplay.• Contourswerecolor-codedto25%IRRat$55wellheadprices(375,000boe EUR).• Numberofacresandproducingwellsinside375kboe contoursweredetermined.• Thenortheasterncoreareaismostlyvolatileoilandisdevelopedon~110acre/welldensity.• Thesouthwesternareaismostlycondensateandisdevelopedon~175acre/welldensity.
Slide6LabyrinthConsultingServices,Inc. artberman.com
EagleFordVariableOperatingExpenses
• Productionexpenses—liftingcosts—are~$9/boe.• Variableoperatingexpenseswere~$14.75perbarrelofoilequivalentin2017basedonEOG&
Sanchez.• Ourlong-termstandard“plug”numberhasbeen$12/BOEbuttheshifttodevelopment&
maintenancemodeintheEagleFordhasincreasedcosts.• $13variableOPEXusedforeconomics(optimistic).• Interestexpensebecauseofhighdebtloadwasasignificantcostformostcompanies.• $5.5mmdrillingandcompletioncosts.
Slide7LabyrinthConsultingServices,Inc. artberman.com
EagleFordEURandEconomicResults
• 2014wasthebestyearforEagleFordEUR:weightedaverageoftopcompanieswas300kboe.• 2013and2015weretheworstyearsevaluated.• 2016wasslightlybetterthan2015.• 2017EURincludesconsiderableuncertaintybecauseofshortproductionhistorybuttheweighted
averagewasslightlylowerthan2016.• TheweightedaverageEURforallcompanies-allyearsis~300kboe withanassociated$50.66/barrel
wellheadorabout$53WTIprice.• At$55wellheadprice(~$57.50WTI)mostcompanieshadpositiveNVP8andIRR>10%.• TheEagleFordplayismarginallyprofitableoverallatprojected2018WTIpricesinthemid-$50
range.• EOG,DevonandConocoPhillipshaveattractiveNPVandIRRatthoseprices.• Using$50asabaseline,approximately1.1billionbarrelsofoilwereproducedatalossin2015&
2016—about45%ofcumulativeEagleFordproductionsince2008of2.4billionbarrelsequivalent.
Slide8LabyrinthConsultingServices,Inc. artberman.com
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WTIPrice($/barrel)
Oil&GasW
ellD
rillingProducerPriceIndex(1985=100)
4-FoldIncreaseInO&GWellDrillingProducerPriceIndexFrom2004-2014
WTIOilPrice(RHS)
Oil&GasWell DrillingCostIndex(LHS)
Source:U.S.Federal ReserveBank,EIA&LabyrinthConsulting Services,Inc.
4-FoldIncreaseinO&GPPIBecauseof
UnconventionalOil&Gas2004-2014
BecauseofHigherCostofUnconventionalTechnology40%DecreaseAfterOil PriceCollapsebut7% Increasein2017
+7%
~40%DecreaseFrom
Deflation
EconomicsAreOptimisticFor2013&2014EagleFord
• Drillingandcompletioncostsbeforeaboutmid-2015wereconsiderablyhigher:$7-9mmperwell.• Economicsareoptimisticforthesewellsbecause$5.5mmwasusedinalleconomics.• Popularperceptionisthatlowerwellcostsareprimarilybecauseofimprovedtechnologyand
operatorefficiency.• Infact,about90%ofcostsavingsarebecauseofpricedeflationaftertheoil-pricecollapsein2014.• Mostwellperformanceimprovementsarebecauseofbettercompletionmethods.• Datasuggests,however,thatmuchofthisisrateaccelerationandnotreserveaddition.
Slide9LabyrinthConsultingServices,Inc. artberman.com
8.3
5.3
2.01.8
1.6 1.5 1.5 1.5 1.4 1.4 1.31.2 1.1 1.1 1.1 1.1 1.0 0.9 0.9
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Parsley
Oasis
Hess
Sanchez
Callon
Energen
Concho
Whitin
g
Laredo
New
field
Statoil
Maratho
n
Apache
Pion
eer
EOG
Diamon
dback
Devon
Continental
Murph
y
OXY EPE
Cono
coPh
illips
RatioofC
apitalExpenditurestoCashFrom
Operations
TightOilIsaMarginalBusinessAtBest73%ofCompaniesLoseMoney(Capex>CashFromOperations)
Basedon10-KFilingsforFullYear2017
MakeMoneyCashFlow>Capex
Lose MoneyCapex>CashFlow
Source:YahooFinance&LabyrinthConsultingServices,Inc.
BreakEven
*Chesapeake hasnotfileda201710-KbutCapex-CashFlowcannotbecalculatedbecausecashfromoperationswasnegativethrough Q32017
10.1
9.4
6.8
6.1
4.8 4.84.6
3.53.3 3.3 3.1 3.1 3.0
2.6 2.6 2.42.1 1.9 1.8 1.7 1.6
1.1
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2
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12
Oasis
Sanchez
Hess
Marathon
EPE
Whiting
Parsley
Devon
Callon
Apache
Statoil
Continental
EOG
Murphy
New
field
ConocoPhillips
Laredo
OXY
Energen
Diamondback
Concho
Pioneer
RatioofCapitalExpenditurestoCashFrom
Operations
TightOilIsaMarginalBusinessAtBest:Debt/CashflowOnly23%ofKeyOperatorsHaveAcceptableDebt-to-CashFlowRatios(<2)
45%areRisky(2-4)&32%areUnacceptable(>4)Basedon10-KFilingsforFullYear2017
Source:YahooFinance&LabyrinthConsultingServices,Inc.
Acceptable<2
Risky2-4
Unacceptable>4
*Chesapeake hasnotfileda201710-KbutDebt-CashFlowcannotbecalculatedbecausecashfromoperationswasnegativethrough Q32017
WhereAretheProfits?
• Mosttightoilcompanieslostmoneyin2017basedonfull-year10-Kfilings.• Capitalexpendituresweregreaterthancashfromoperationsfor73%ofevaluatedcompanies.• Riskytounacceptablyhighdebtlevelscharacterize77%oftightoilcompanies.• Companieshavebeenclaimingprofitabilityatpricesbelow2017averagelevels($51WTI)since
2016.• ThisstudysuggeststhatwasnotgenerallytrueintheEagleFordShaleplay.• Corporatefinancialfilingsconfirmtheeconomicsfromthisstudy.• Tightoilremainsamarginalbusinessafter10yearsofproduction.
Slide10LabyrinthConsultingServices,Inc. artberman.com
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MonthlyOilP
roduction(barrels)
MonthsofProduction
ConocoPhillips 2017Wells EagleFordWellsHaveSteeperDeclineRateThanWells FromPrevious YearsDespiteHigherInitialProduction Levels
20132015 2014
2017
Source:Drilling Info&LabyrinthConsultingServices,Inc.
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MonthlyOilProduction(barrels)
MonthsofProduction
Sanchez2016&2017EagleFordWellsHaveSteeperDeclineRatesThanWells FromPrevious Years
2016 20132015 20142017
Source:Drilling Info&LabyrinthConsultingServices,Inc.
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MonthllyOilProduction(barrels)
MonthsofProduction
EOG2016&2017Wells EagleFordWellsHaveSteeperDeclineRateThanWells FromPreviousYearsDespiteHigherInitialProduction Levels
2013
20152014
2017
Source:Drilling Info&LabyrinthConsultingServices,Inc.
2016
InitialHighProductionRatesCanBeDeceptive
• Cumulativeproductioncomparisonsindicatethatwellperformanceinrecentyearsispoorerthaninpreviousyears.
• 2017wellsforEOGandConocoPhillipshadhighinitialproductionratesbutsteeperdeclineratesthan2016wells.
• 2017wellsforthesecompaniesarelikelytohavelowerEURsthan2016wellsasaresult.• EOG2016wellsappeartobecrossing2015trendsandmayhavelowerEURsthaninthatyearalso.• Sanchez2017and2016wellsappeartobemuchworsethanwellsinmostpreviousyears.• Thesecomparisonsrepresentaveragesbutsuggestthatclaimsofperformanceimprovementsmay
bepremature.
Slide11LabyrinthConsultingServices,Inc. artberman.com
ImplicationsforFutureProduction
• EURanalysisandcumulativeproductioncomparisonssuggestthatmuchoftheEagleFordisprobablyatorbeyondoptimumdevelopment.
• HighEURsforEagleFordsuggestlargedrainageareas.• Currentwellspacingof100acresprobablyexceedsoptimuminfill.• Poorerlate-yearwellperformancemaybeduetowellinterference.• Operatorstalkaboutthepotentialofofdevelopingadditionalzones.• Thisisalwaysapossibilitybutitseemsreasonablethattheseotherlevelsarealreadycontactedby
exitingfrackverticaldimensions.• ThisstudyconfirmstheattractivenessoftheEagleFordplaybutsuggeststhatitsbestdaysmaybe
inthepast.
Slide12LabyrinthConsultingServices,Inc. artberman.com
• ThisstudyshowsthatEagleFordwellsfortopoperatorsaverage300kboe butmanyoperatorsclaimEURsthatareconsiderablyhigher.
• PartofthedisparityisexplainedbyBOEconversionfactors:abarrelofNGLsiscountedthesameasabarrelofoileventhoughitsenergycontentandvaluearelessthanhalfofabarrelofcrudeoil.
• A6:1naturalgastoboe conversionaccuratelyreflectsenergycontentbutnotvalue.• Sanchezshowshowitarrivesat877boe foranaverageComancheAreawell.• Usingthevalue-basedapproach,theaverageSanchezComanchewellis572boe--adifferenceof
35%.• 877boe alsorepresentsa“3-StreamEUR”consistingofmultiplezonecompletioninupper&lower
EagleFord&AustinChalk.Thisissomewhatmisleadingandrepresents“possible”notprovenreserves.
• Itisunclearhowrepresentative“ComancheArea3”isofSanchez’saveragewells.
ReconcilingStudyEURObservationsWithOperatorClaims
Slide13LabyrinthConsultingServices,Inc. artberman.com
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peted(DUC)W
ells
WellsDrilled&Com
pletedPerM
onth
MoreEagleFordWellsBeingCompletedin2018vs2017WithHigherOilPrices&MoreFrackCrews
1,492EagleFordDUCs(drilleduncompletedwells)315DUCsaddedsinceNov2016
DUCs(RHS)
Drilled
Completed
Source:EIA&LabyrinthConsulting Services,Inc.
EAGLEFORD
YEAR Drilled Completed DUC DUCs/Mo PCTDUC/WellsDrilled2018YTD 356 293 14 7 4%2017 1,982 1,697 285 24 14%
Nov2016
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Crude+ProductComparativeInventoryDecreased-4.3mmbWeekEndingMar9
Comparative Inventory (C.I.)Millionsof Barrels
WTIPrice($/barrel)
Source:EIA
&LabyrinthConsultingServices,Inc.-Aperio
EnergyResearch
Mar-June 2015FalseOptimism
Early 2017OPECProduction-Cut Optimism
2012-13MarketOptimism
Late2015-Early2016MarketPessimism
Mid-CyclePrice~$65
Mid-CyclePrice~$73
Long-TermYieldCurve
Emerging2018YieldCurve?
Comparative Inventory (C.I.)Millionsof Barrels
WTIPrice($/barrel)
Source:EIA
&LabyrinthConsultingServices,Inc.-Aperio
EnergyResearch
Mar-June 2015FalseOptimism
Early 2017OPECProduction-Cut Optimism
2012-13MarketOptimism
Late2015-Early2016MarketPessimism
Mid-CyclePrice~$65
Mid-CyclePrice~$73
Mar9$61.65
Larger-than-Avg CrudeAddition (+5.0vs+3mmb5YA)OffsetbyLarger-than-AvgGasoline(-6.3vs-2.6mmb5YA)&Distillate(-4.4vs-0.7mmb5YA)Withdrawals
WTICorrectly PricedatWeeklyAvg$61.05PriceBasedonEmerging2018YieldCurve
ImplicationsforFutureOilPrices
• Oilpriceshavebeenstagnantforseveralweeksafterreaching$66WTIinearlyFebruary.• Pricesareabove$65todaybutoiltradersarebearishaboutthedirectionofpricesin2018.• IEAandEIAhavewarnedabouttheexplosionoftightoilproductionandU.S.supplyisabove1970
recordhighlevels.• Therigcounthasdoubledatmostlysub-$50pricesandthenumberofdrilled,uncompletedwells
continuestogrow.• Itislikelythatthemarkethasre-pricedoildownwardbecausethereisadequatetomore-than-
adequatesupplyforthenearterm.• $65+/- mayrepresentthehighmarkfortheunfoldingnextpricecycleandthepossibilityof
downsideisatleastashighashigherprices.
Slide14LabyrinthConsultingServices,Inc. artberman.com
ConcludingObservations
• TightoilplayshaveaddedadecadeofadditionalsupplytotheU.S.• Reservesarenotlarge(15billionbarrels)byglobalstandardsespeciallyconsideringthe~90,000
currentwellsneededtoproduce5mmb/d.• Tightoilismoreexpensivethanconventionalplaysbecausehorizontaldrillingandhydraulic
fracturingiscostly(despitelowerprices).• ThepresentpriceofWTIis2.5timeshigherthanaverageprices1986-2004inconstant2017dollars.• Technologydoesnotcreateenergy.Itpermitsextractionofknownresourcesathigherrates.• Tightoileconomicsaremarginaltodatealthoughcurrentpricesshouldmakemostplaysprofitable.• Over-productionwasthemainfactorintheoil-pricecollapsein2014.Resurgentover-productionis
likelytodepresspricesagain.• Tightoilvolumeshavesurprisedmanyanalysts.• Futuresupplyissolelydependentoncapitalmarkets.
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CPIAdjustedW
TIPrices(October2017DollarsPerBarrel)
1974-1985OilShocks
-->
Massive E&PInvestment(North
Sea,Mexico,Siberia)
Over-Supply, DemandDestruction&Price
Deflation
Debt-FueledEconomic
Expansion&RapidGrowth
inChina&EastAsia
2004-2014MassiveE&PInvestment
(Shale, DeepWater,HeavyOil)
2015-2017Over-Supply
&Price
Deflation
Average2015-2018WTIPrice2.5TimesHigher
ThanAverage1986-2004inFeb2018Dollars
Source:EIA, U.S.Bureau ofLaborStatistics &LabyrinthConsulting Services,Inc.
$36Avg
1stBubble 1974-1985
2ndBubble2004-2013
$93Avg
$71Avg
$24
Avg
$50
Avg
DepressedPrices 1986-2004
46%LowerThan2004-2014&29%LessThan1974-1985