Sit tight for 4 more years, Mike - Total figured it’ll take that long to go into 10mm deficit

https://www.argusmedia.com/en/news/2185346-total-warns-of-10mn-bd-oil-supply-shortfall-by-2025

Chesapeake exits bankruptcy as CEO Lawler sees ‘new era’ for shale (worldoil.com)

Chesapeake walked $7.7 billion dollars of debt and re-emerged bankruptcy recently. Its laying off folks so fast they can't all get out the door together. What does CHK do after bankruptcy? It immediately borrows another $1.3 billion dollars and its corporate elevator operator says this: “We’re going to offer a very competitive, free-cash flow generation machine that has a disciplined approach to our capital-reinvestment rate, that has a very strong, disciplined approach to our cash cost – focused not just on profitability but also sustainability,” Lawler CHK's CEO) said.

Chesapeake has been in the shale oil and shale gas biz for 18 years; its never made a nickel. Now, its going to rock. How?

You know who made lots of money at CHK?

Lawler did. Over $100MM in just the last 5 years. The curve with the big sag in it is CHK earnings compared to his compensation.

The idea that this fella comes out of bankruptcy, with that big shit eating grin on his face, saying he is going to offer a "free cash flow generation machine" makes me want to take the American Needs America's Oil bumper sticker off my truck in shame and embarrassment.

New shale oil wells deliver profitability (with profitability is here meant returning a yield above at least 7% before inflation adjustments [currently around 2%]) with an oil price of $70 - $80/Bo (using current well productivities as derived from actual data) during the well’s lifetime.

Shale’s big problem now has been and will continue to be a long period with too low oil prices, which continually increases the financial burdens from employed capital (both owners’ capital and debt, capital that needs to be recovered before a profit can be made) on the rapid declining remaining Proven Developed Producing (PDP) reserves.

At current oil prices (around $60/Bo [Brent]), this will only worsen with time.

Put another way, as time passes, and at the current oil price, each remaining oil barrel [in the ground] of the rapidly declining remaining PDP reserves will see rapid growth in its financial burden to reach breakeven.

It was estimated that the estimated remaining PDP reserves for the Permian as of Sep-20 needed about $80 - $85/Bo to reach a non-inflation adjusted breakeven (looking at the Permian as one big project).

To make a non-inflation adjusted return of 7% (which these days are decent), each remaining barrel in the ground as per Sep-20 would have to catch an estimated $120/Bo as they left the wellhead.

Applying statistics would present such a lasting oil price, an infrequent event.

To illustrate this simplistic, say someone invested $1M in a company drilling shale oil wells in 2018, and they nominally got their $1M back in 2028 after 10 years.

The purchasing power of the $1M in 2018, and assuming an average CPI/inflation of 2,5% in the period, would by 2028 reduce the purchasing power from the $1M originally put to work in 2018 to $0.78M.

Keep in mind that this $1M invested will be returned to the investor after having been recirculated by the operating company into new wells and after debts are paid back.

Burying the same $1M in the backyard with the dog bones in 2018 would be a better alternative as you could recover that $1M any time you needed it before 2028 (it would still depreciate due to inflation).

Thank you, Rune. For those who don't know Rune Likvern please google his name and, with regard to shale economics and finance, best listen up. He knows his stuff.

For me there are a number of very important takeaways from this comment; the definition of when "profit" actually begins, for instance, and the the time value of capex that often takes 4-5 years to recover, or more, on a per unit (well) basis.

Also, when I think of the burden that declining PDP has on the ability to service and pay down legacy debt I often forget that remaining PDP must also carry a much greater portion of production costs, for instance the cost of building and managing infrastructure to handle oceans of water in the Permian. Liability insurance, G&A, etc. Lost too in all the hubbub about rig efficiencies and economies of scale is the simple fact that most services to the shale oil sector are now provided at a loss. That simply cannot continue to happen or there will not be a sector left to service shale oil. As prices inch higher costs WILL increase, I believe. Significantly.

Otherwise I do not wish to distract from this terrific comment, only to remind people once again to not buy into the hype. Prices have to go WAY up to save most of the shale oil sector now, as Rune outlines for us.

Thank you, Rune. I am honored you commented. Please come back anytime.