Why Are There ANY Rigs Running In the Permian Basin ?
Last week there were still 137 HZ rigs running in the Permian Basin. Whazzup with that?
Oil and natural gas wells make money or they don't. They don't start making money until they have paid back ALL costs associated with acquiring the lease to put that well on and ALL drilling and completions costs, including corporate overhead to run the business and, in the case of shale oil wells, the cost of debt. It's only when wells are marginally profitable, or completely unprofitable, do folks start falling back on terms like EBITDA, DD&A, IRR and other kinds of funky accounting horse dookey. Actually, well economics need not be any more complicated than this simple exercise...
Check the barrels of oil equivalent (BOE) hooey at the door, they flare the snot out of gas in W. Texas because its just about worthless. $40 WTI after marketing deductions, State severance taxes and county ad valorem taxes equals $34 dollars per incremental barrel of oil, give or take a buck. Deduct 25% royalty burdens from that and you get $25. Remember, everybody produces lots of water in the Permian and it ain't cheap getting rid of that stuff: use $7.00 per incremental BO for lift costs, another $2.85 for general overhead costs and $3.25 for interest expenses on long term debt. That leaves you with $12 per barrel, net back. I call it take home pay.
Divide $12 per BO take home pay by $9.0 MM, full cost drilling, completion and leasehold expenses per well and you must produce 750,000 B0 just to pay that well back...before you make a nickel of profit.
So, how many unconventional horizontal wells in the Permian Basin will actually produce 750,000 barrels of oil in their lifetime?
The chart above is realized production data filed with the Texas Railroad Commission and presented by shaleprofile.com. I have arbitrarily picked 42 months as the maximum (not optimum) length of time to reach well payout in the Permian Basin. Basically if a well is not paid out in 36 months, it will NEVER pay out. 11,416 horizontal wells out of 26,826 drilled since 2008 in West Texas are now 42 months old and only 0.05% of of all those wells have reached 760,000 barrels of cumulative oil production or more.
So the answer to the 750K BO question is... not very damn many will EVER pay out below $40 WTI. Anybody who says differently is trying to sell you something.
As to why any HZ wells are STILL being drilled in the Permian at the moment...it beats the hell out of me. Those dudes need cash flow to pay interest on debt, they are committed to hedge volumes, loan covenants and continuous drilling provisions in leases and other conveyances and they are using what is left of their revolving lines of credit, getting deeper and deeper in debt, to stay on the drilling hamster wheel. It is not because Wolfcamp, or Bone Springs wells in the Permian Basin are economical. No way; not even close.
Keep well economics simple and tune out all the noise from investor presentations, data-sell companies or self prescribed, shale oil "analysts."