The Responsiblity of Influence
I do not pretest to be anybody other than a dumbass roughneck who has drilled and completed LOTS of wells with his own money. I don't have a college degree nor initials to put after my name, but after 45 years I do understand well economics and how to manage oil and gas production.
My counterpart's credentials are those of great influence across America, as a keynote speaker, a frequent podcast participant, a guest on cable net news networks and someone who when speaks, people listen...including the President of the United States, I'm sure. I respect this gentleman's contributions to my industry and the fact that he made an absolute killing when he sold his data sell company at the height of the shale oil phenomena.
So, how many HZ shale oil wells actually pay out in a year and get to 140% ROI at $40 WTI in America?
I rely on the impeccable realized production data from shaleprofile.com that comes straight from the Railroad Commission of Texas, so let's see...
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Dewitt County in the Eagle Ford shale play of S. Texas is the most productive county in all of America's shale oil basins. Whoa Nellie, there are some good wells in DeWitt County. The 2nd and 3rd most oil productive counties in the US are Howard and Midland Counties in the Midland sub basin of the Permian. They are drilling the snot out of wells out there and over half the current rig count in the Permian (151, July 2020) are working these two counties. The Permian Basin is America's shale oil hot spot, America's oil future. Let's pick Midland County and go with that....
I am going to leave out associated gas and natural gas liquids in my roughneck economics; it makes a difference, sure; but not much, not at $1.37 per MMBTU at the WH for WaHa in West Texas. I will use $38 WTI also; WH prices always run about $3.30 per BO less than what you see on CNBC. It's hard to hedge much above $38 at the moment. I've picked the biggest Midland Basin HZ operators for estimating G&A, interest expense on long term debt and lift costs, all per incremental BO...not BOE. It looks something like this:
$38 per BO - 7% severance and property tax (-2.66) - 22% RI burdens (-7.77) - $3.05 G&A - $3.32 interest expense -$ 8.00 lift, including well intervention costs, etc. = $13.00 per barrel net back. That's take home pay after all costs are deducted. Hell, lets just round that up to $15 per BO take home pay to make associated gas believers happy.
In its current investor presentations Pioneer claims it can drill and complete the average Midland Basin well with 9,800 feet of lateral for $8.5MM.
At $15 net back prices per BO an $8.5MM well requires 566,666 BO to pay out.
566K BO, just to pay the stinking well out. Let's be generous and drop that down to 500,000 BO for the associated gas lovers. You can tinker with this payout number all day long if you want; including increasing royalty burdens, do the 'ol non-GAPP two-step and jack with EBITDA, NPV, IRR, ROCE, yakity yak...think of it all as money out v. money coming in. Like your working out of a checkbook. Your checkbook !
How many Midland County HZ wells have produced 500,000 BO in the first 12 months of production since 2009?
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Two. Two out of 2,307 total HZ wells since 2009, or 0.0867 percent of the total.
How many Midland County wells drilled since 2009 have made 700,000 barrels of cumulative oil in their lifetime to earn a 140% rate of return on initial investment of $8.5MM at $40 WTI?
Two wells. Two out of 2,307 wells. Howard County, by the way, is almost the same.
Are Midland County wells getting better with longer laterals and more sand stuffed into them ?
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They are, actually, but ever so slightly and at higher costs. Are they getting good enough to payout in one year, or reach 140% ROIs and $40 WTI, even $55 WTI? No! The percentage of shale oil wells drilled, or being drilled today that will pay out in one year is nil. 140% ROI's at even $50 WTI is a dream. And so what, by the way? 40% over 12-15 years sucks. How do you make amends for the 70% of shareholder equity you have destroyed the past 3 years, or pay back nearly $300 billion dollars of public and private debt making 140% ROI's?
The point in my post is that there are still a lot of important people in the country cheerleading for the US shale oil phenomena by saying stuff that cannot be substantiated by facts. Its misleading to lenders, to investors, to the general public and most of it, too really dumb politicians who are in charge of America's current and future hydrocarbon future. How is that helping anything?
"Leadership" in the shale oil industry will now say almost anything to keep the party going, to keep folks willing to invest in it, to create the illusion that the business model is actually still... sustainable. I've grown weary of that. Noble's bonuses to upper management three days before filing bankruptcy, Oxy's late Friday night announcement it's going to give its management pay raises, the bullshit the President said in Minneapolis, sorry, Midland, about saving "millions" of Texas jobs, about energy independence...the dung heap never ends.