[dcoyne78]

Rockman,

Thank you. I appreciate you looking up some of this info and presenting it here. I also appreciate you answering my (not so informed) questions and pointing it out when my scenarios look particularly foolish, eventually they might be somewhat useful as some of the holes poked in them become filled with something better than plant food. Enjoy the rest of your vacation.

DC

[dcoyne78]

$this->bbcode_second_pass_quote('ROCKMAN', '
')DC - I did make on goof by not pointing out my numbers were for oil only and didn't include NG or ngl's. But since they tend to be somewhat proportional to the oil volumes they give one a sense of magnitude. Working on a tablet at the moment it's not as easy to run the DrillngInfo in Excel. When I'm back next week I'll try to ship you the raw data so you can cook yourself.

[ROCKMAN]

DC - I try to get onto it tonight. Not sure how much P Basin data I can come up but I'll hit it after the EFS.

[ROCKMAN]

DC - Didn't see a PM from you. Might been me. I haven't been able to send a PM for a while.

[TheDude]

Shale Grab in U.S. Stalls as Falling Values Repel Buyers - Bloomberg

$this->bbcode_second_pass_quote('', 'O')il companies are hitting the brakes on a U.S. shale land grab that produced an abundance of cheap natural gas -- and troubles for the industry.
The spending slowdown by international companies including BHP Billiton Ltd. (BHP) and Royal Dutch Shell Plc (RDSA) comes amid a series of write-downs of oil and gas shale assets, caused by plunging prices and disappointing wells. The companies are turning instead to developing current projects, unable to justify buying more property while fields bought during the 2009-2012 flurry remain below their purchase price, according to analysts.

The deal-making slump, which may last for years, threatens to slow oil and gas production growth as companies that built up debt during the rush for shale acreage can’t depend on asset sales to fund drilling programs. The decline has pushed acquisitions of North American energy assets in the first-half of the year to the lowest since 2004.
“Their appetite has slowed,” said Stephen Trauber, Citigroup Inc.’s vice chairman and global head of energy investment banking, who specializes in large oil and gas acquisitions. “It hasn’t stopped, but it has slowed.”
North American oil and gas deals, including shale assets, plunged 52 percent to $26 billion in the first six months from $54 billion in the year-ago period, according to data compiled by Bloomberg. During the drilling frenzy of 2009 through 2012, energy companies spent more than $461 billion buying North American oil and gas properties, the data show.

[ROCKMAN]

Pstarr – The article is a little confusing to me. I think they are referring to the sale of producing wells and not drilling leases. Which actually would represent just the opposite of the dynamic they seem to be offering. Production acquisition runs opposite of drilling activity. Production acquisition, the other half of asset divestiture, booms in anticipation of a down turn. OTOH when companies are doing well drilling they tend to sell fewer producing properties for a good reason: their value is too high. Unless I knew a company was in financial trouble I wouldn’t waste 5 minutes evaluating an offer to sell any oil production today. Especially with the recent increase in oil prices.

It’s no different than the real estate market: when are you going to have to pay too much for a house: during a recession or booming economic times? If oil prices were to slide to, let’s say, $75/bbl for an extended time then there could be some good deals to be had from companies having trouble with their debt load and drilling obligations. The only way to justify paying for production at today’s prices would to have some outstanding drilling upside that goes with the deal. If someone wants to buy oil production based upon expectations of higher prices alone they are foolish to buy physical wells. Much better to just buy oil future contracts. You can’t turn around and sell an oil field in 24 hours when you start seeing your investment go sideways on you. Futures you can dump and stop the bleeding right away.

Bottom line: if they are only talking about the sale of producing oil properties slumping then that’s a red flag for optimism by the companies drilling and producing. OTOH if there were a surge in the sale of producing shale fields that would be a clear sign of trouble ahead for the companies IMHO. Either they are running out of sweet spots to drill and/or they can’t handle the debt load. For instance it been reported that Chesapeake’s balance sheet is looking better these days. But look at the details: analysts have reported that 2/3 of their improvement has come from liquidating assets and only 1/3 from new operations. I stopped counting over a year ago when CHK had sold over $25 billion in assets at that point in order to just keep the doors open and operations going forward.

In the oil production acquisition biz the same winning philosophy applies as with other commodities: buy low…sell high. That’s tough to do when an investment is selling for top $ as oil producing wells are doing today.

[rockdoc123]

$this->bbcode_second_pass_quote('', 'B')ottom line: if they are only talking about the sale of producing oil properties slumping then that’s a red flag for optimism by the companies drilling and producing. OTOH if there were a surge in the sale of producing shale fields that would be a clear sign of trouble ahead for the companies IMHO. Either they are running out of sweet spots to drill and/or they can’t handle the debt load. For instance it been reported that Chesapeake’s balance sheet is looking better these days. But look at the details: analysts have reported that 2/3 of their improvement has come from liquidating assets and only 1/3 from new operations. I stopped counting over a year ago when CHK had sold over $25 billion in assets at that point in order to just keep the doors open and operations going forward.

[rockdoc123]

$this->bbcode_second_pass_quote('', 'S')o your point RD is that CHK knew all along that the shale-bidness was a fast bubble, and they intended to keep the good stuff for themselves? You mean they planned to hire the media, pols, and internet trolls to promote the rest, and sell off the junk to clueless investor-types (mom and pop) before the market collapsed? Wow! That is some savvy sh#t

[dcoyne78]

$this->bbcode_second_pass_quote('ROCKMAN', 'D')C - Didn't see a PM from you. Might been me. I haven't been able to send a PM for a while.

[ROCKMAN]

DC - Got it. But will be Monday. Too slow at the house.

[ROCKMAN]

The Texas boom is booming louder. For the first 6 months of 2013 oil production is 16% higher than first 1/2 2012. Combined with higher oil prices the value of Texas production is 35% higher for the same periods.

FYI: that represents $300 million in those 6 months in production taxes for the state and counties. And PA did collect one penny in production taxes for the same period. Go figure.

[dcoyne78]

Hi Rockman,

It is indeed booming, and I believe the TRRC data somewhat underestimates the boom.

Consider the following charts:





data can be found at

https://sites.google.com/site/dc78image/files-1

in an Excel file named "texas oil.xlsx", click downarrow at far right of the file name to download, the files are listed alphabetically.

Note that the second chart compares RRC data downloaded in Feb 2013 to more recent data from Aug 2013 and then does the same for data from the EIA.

Based on EIA data (and assuming June RRC data is low by 25 %), the first 1/2 of 2013 is 31 % higher than first half of 2012, almost double your estimate. We will see how the TRRC data changes over time, as the EFS slows down the EIA may end up overestimating, so my guess could be too high, but the TRRC data is usually pretty far off for the most recent 12 months and historically the EIA data has been a much better estimate for statewide C+C output in TX.

DC

[ROCKMAN]

DC - Could be off that much. Didn't mention it but my quick and dirty source was rigzone...not known as the best source. I figured those numbers were low but I thought that was enough bragging. The problem with rrc numbers is late reports by operators and the rrc staff hasn't increased much despite the drilling boom.

BTW: I meant to say PA HASN'T collected one penny of severance tax. Still a shocking miscarriage of the public trust IMHO. Thanks to Texas severance tax my tuition at grad school at Texas A&M was less than $500 per semester.

[dcoyne78]

I agree on the PA lack of taxes, I don't understand why northern states don't just adopt TX oil and gas policies, no need to reinvent the wheel. I guess PA has been doing oil and gas for a while (1859 I believe), but a lot of Americans think tax is a four letter word .

Go ahead and brag, the EFS has been on fire going from 1.4 % of TX output in May 2010 to 36 % of TX C+C output in May 2013 (based on TRRC data), while TX total C+C output increased from 1.2 MMB/d to 2.2 MMB/d over the same period (EIA data). In fact the EFS output has increased by 900 kb/d over the 3 year period from May 2010 to May 2013(combination of EIA data and % of total output from TRRC), so that most (90 %) of the TX miracle has been the EFS.

My guess is that the EFS will slow down soon and think a peak will be reached in 2016 at about 1.2 MMb/d, if oil prices follow the EIA reference scenario and wells are added at about a 2100 well/year rate up to 2015 and avg well productivity (EUR) begins to decrease around mid 2014 at a rate of 12.4 % per year. As EUR decreases, profitability also decreases and the rate that wells are added decreases starting in 2016 and falling to 1800 wells per year by 2017. It is also assumed that 5 year NPV with an 8.75 % discount rate must remain above breakeven, if not wells are added more slowly which slows the decrease in EUR so that drilling remains profitable. Break even calculations are based on: 20 % royalty and taxes, $7/ barrel OPEX and financial costs, transport costs of $3/barrel, and real well costs (drill +frack) falling to $7 million by 2016, from $8 million today.



BTW I realize that you think these scenarios are silly, though I think they are useful as long as the assumptions are laid out clearly. In reality the assumptions always prove to be incorrect, but with input from people like you we can create a set of scenarios with "reasonable" assumptions that may bracket future possibilities. The scenario presented is fairly realistic and would represent a middle scenario in my mind(though I would love some input as to how realistic these assumptions are). It is only a prediction of the future if all of the assumptions are correct, which is highly unlikely.

DC

[ROCKMAN]

DC - Not silly at all. Models are OK. But they are also like masturbating: nothing wrong with it as long as you don't start thinking it's the real thing. LOL.

I don't make fun of anyone's prediction until I see if they are correct or not. If correct I admit I thought they were right the whole time. If wrong then I'll blast them. That's the only way to not look foolish in the prediction game IMHO.

[John_A]

$this->bbcode_second_pass_quote('dcoyne78', 'I') agree on the PA lack of taxes, I don't understand why northern states don't just adopt TX oil and gas policies, no need to reinvent the wheel. I guess PA has been doing oil and gas for a while (1859 I believe), but a lot of Americans think tax is a four letter word .

[dcoyne78]

$this->bbcode_second_pass_quote('ROCKMAN', 'D')C - Not silly at all. Models are OK. But they are also like masturbating: nothing wrong with it as long as you don't start thinking it's the real thing. LOL.

I don't make fun of anyone's prediction until I see if they are correct or not. If correct I admit I thought they were right the whole time. If wrong then I'll blast them. That's the only way to not look foolish in the prediction game IMHO.

[ROCKMAN]

DC – Not criticism but teasing. Models are great but not as much for predictions IMHO but for identifying which are the most critical assumptions involved. That allows one to focus efforts on those while ignoring the others.

During the last 38 years the most common DR I’ve seen is 10% with 15% a close second. Other rates have been rare. The life of an EFS well isn’t important in the NPV calculation. The production curve converted to net cash flow is what’s used. The high initial rates give a boost to NPV. After production declines significantly even absolute cash flow isn’t very impressive. And after production declines 60% to 80% over the first few years the NPV calculation will begin to impact the value of those future reserves. So in a way whether one assumes a long tail (say 10+ years) to the production curve or not isn’t very relevant: after 8 years or so even a 10% DR will reduce the NPV of that future production so low it becomes inconsequential in the ROR calculation. This true even for wells that have a significant amount of production that far out. IOW a 10% to 15% DR is a real buzz kill when it comes to calculating NPV for long lived wells. Doing a production acquisition I don’t bother to argue about future production volume estimates beyond 8 years since they have almost no bearing on my calculation of the value of the acquisition.

I hesitate to forecast the change in EUR. The problem is that wells drilled in 2 years will be done differently than wells drilled 3 years ago. Besides having longer laterals and more frac stages some may be drilled on tighter spacings. Longer laterals are one way to offset the lower production potential of the less sweet spots. So some of these future wells might have EUR’s comparable to earlier sweeter wells. But it will come at a higher costs. Two wells might project to have the same EUR’s but one may cost 50% more to drill than the other so it diminishes it’s economic significance even while delivering the same amount of oil.

And for the love of Dog stop making projections down to the tenth of a percent. Remember what we geologists say 2 + 2 is equal: somewhere between 3 and 5. LOL