[shallow sand]

Can anyone lead me to a reference that contains calculations of:

PV10 of Bakken wells
PV10 of Eagle Ford wells
PV10 of Permian unconventional wells

I never see this referenced anywhere. As it appears more debt is required to keep drilling these wells, would think this would be of utmost importance.

If the numbers don't work, don't see how drilling can continue. Last I knew, banks and debt issuers weren't allowed to ignore this.

[GHung]

The various companies provide their own projections, including PV-10. Can't find any central source or average.

shallow sand: "If the numbers don't work, don't see how drilling can continue. Last I knew, banks and debt issuers weren't allowed to ignore this."

Anyway, here's one take on it. Kunstler, today:

$this->bbcode_second_pass_quote('', 'T')hat industry has been relying on high yield “junk” financing to perform its relentless drilling-and-fracking operations — imperative due to the extremely rapid depletion rate of shale oil wells. Across the board, shale oil production has not been a profitable venture since it was ramped up around 2006. Below $80 a barrel, chasing profit only becomes more difficult for those who couldn’t make a profit at $100. A lot of those junk bond “investments” are about to become worthless, and the “investment community” will lose its appetite for any more of it. That will leave the US government as the investor of last resort. Expect that to be the object of the next round of Quantitative Easing. The ultimate destination of these shenanigans will be the sovereign debt crisis of 2015.

[ROCKMAN]

shallow - There is no PV10 of the "average" EFS I've seen anyone offer. Individual companies will calculate for their own wells but not other companies. In 40 years I've never done it for a well that I didn't need it for. If you or anyone wants to do it just have at it: all you need to do is estimate the daily production for each well drilled in the last 5 years or so going out to its future economic limit, pick a forward price projection for the remaining life of each well and find the different royalty and lease operating cost for each well including the estimated P&A cost. After you have those numbers all you have to do is enter those hundreds of thousands of data points into the appropriate computer program and you'll have your answer.

We anxiously await your numbers. LOL

[shallow sand]

I found a couple quickly for end of 2013

PV10 for Whiting Petroleum $8,994,000,000
PV10 for Continental Resources $20,200,000,000

That is not just PDP

This is using an oil price of $96.78

Again, wish I had the ability to calculate PDP for each of these at current WTI strip discounted to Williston Light Sweet posted price. I bet that 70% of PDP at that strip is less than each of these companies' total liabilities. I always thought 70% of PDP was an important figure.

I am stunned that no one is shouting this from the roof tops. Again, what am I missing??

[shallow sand]

ROCKMAN. I get it. I'm not talking about doing every well. I also know that the "average well" is subject to a lot of variables, such that it cannot be calculated with precision.

But it can be estimated within are fairly reliable range I would think. I see some posters on peakoilbarrel.com have posted decline curves for all Bakken wells by year, recently.

If I had the software I would take a stab, but I don't.

BTW, read that a large number of Eagle Ford wells did not average 100 bopd from 9/13 to 9/14. That sounds like a lot of $$ down the drain.

[shallow sand]

Per 2013 annual reports:

Whiting PDP PV10 $5,472,000,000
PUD PV 10 2,970,000,000

Continental PDP PV10 $10,461,000,000
PUD PV10 $ 9,664,000,000

Both of the above assume well head price of over $90 per bbl.

Whiting total liabilities and Continental total liabilities are both in the neighborhood of PDP PV10 at $90 well head. Therefore, if you use the current strip, PDP PV10 will be below total liabilities. I thought you pretty well couldn't get a loan to drill wells if your total liabilities were over half of PDP PV10. Maybe that just applies to the small fries.

This is interesting stuff to me, apparently to no one else. IMO these companies are in tremendous trouble if WTI stays at $75 or goes lower for 2015 and 2016, as many are now predicting. Yet they continue to have a tremendous market cap and intend on drilling the same as they have in the past. They are among the leaders in the Bakken.

I guess I am not putting as much value on the probable and possible as the market is.

How can they continue to borrow/float debt if PV10 for PDP and PUD goes below total liabilities outstanding? I admit I don't know a lot, therefore someone poke holes in my posts please.

[sjn]

shallow sand, you're probably on the money. Now, who do you think wants to hear this information? There's a lot of denial going on, nobody with skin in the game wants to believe in anything but rainbows and unicorns. Another thing to keep in mind, many operators may well be hedged through the futures market so current prices won't immediately impact them.

[kenberthiaume]

There's a difference between cashflow and earnings.

They might be "earning" money, but have negative cash flow anyway.

That's the reason they borrow money so much. It's an investment in the well...if they had to rely on their own funds it'd be much slower. So they turbo charge it so to speak by borrowing money and drilling faster. Doesn't mean they're not profitable.

CLR's costs including amortized drilling expenses, overhead etc. were about 50% of revenues. THat's pretty profitable.

[shallow sand]

Ken. I am just going by how oil production is typically valued for collateral purposes by banks and trying to understand why this apparently doesn't apply to shale, i.e., why it is valued so much higher. Probable and possible acreage maybe?

Also, when will CLR pay back the debt? They have bonds for pretty long maturities for wells that deplete quickly.

Sjn. Many are hedged. CLR liquidated all of their oil hedges recently. Surprising move. Hedging is not an easy business.

They will be fine if the price of oil goes back up considerably and stays there. $100+ at a minimum. My whole purpose for pointing all of this out is that there are many calling for $75 or less for 2 years or more. I think they may not be able to keep the drilling train going without creditors ignoring the warning signs. In fact, I am surprised they have been able to borrow as much as they have already.

[ROCKMAN]

Shallow - Sorry...I thought you wanted the real numbers. LOL. SEC numbers probably aren't too inflated but I promise you they aren't that high. And obviously as oil prices drop the PV numbers declines. But you should appreciate better then most why they are that high: high initial production rates. That "front loads" the revenue stream. Now imagine what those PV values would be in 5 years if both companies stopped drilling the shales: almost nothing. And now why trying to buy production from guys like you is so different: calculate your PV10 today. Now calculate the PV10 of those same wells 5 years from now. Not much smaller, eh? Which is why buying production from guys like you is a pain in the ass: if I paid you PV10 for your reserves today what would you have in 5 years: the PV10 I paid you. And if you kept it for 5 years and sold it to me for the PV10 at that time what would your have: 5 years of production revenue + almost as much as I would pay you today. Long ago I coined the term "CPV"...constant present value. Which is really just almost CPV...unless oil prices increase, of course.

Or put it this way: what would you pay a shale producer for his $10 million PV10 reserves vs what you would pay for stripper wells with $10 million PV10? A hell of a lot less... right? In fact I doubt you would even pay him half of his PV10: it would take you many years to recover the purchase price let alone into the black very far. I'm sure Shallow gets it but might be a little foggy for some others. Essentially the shale players are getting their investments back plus a little more. But future value of their wells beyond 5 years or so... not much. Shallow's stripper production would be worth almost as much in 5 years as it's worth today. Or very simply: if a pure shale player stop drilling the value of the company falls to just a small fraction of its current value. And they are gone. Especially if they are a pubco: their stock would have more value as toilet paper. LOL.

[shallow sand]

ROCKMAN. The shale is completely opposite of what I am used to admittedly. I'm just used to a banker telling us, "we will loan 50-60% PDP PV10, are not going to put much value on PUD and will use our price deck, adjusted to your basis differential.". Shale guys have borrowed over 100% PDP PV10. Obviously we are small fries compared to the shale players. Interesting how CLR has debt with maturities of 10-30 years on high decline production, and pee wees with 2% decline are required to pay on amortization over 5 years. Add to that that we've set back $6000 per net bbl cash and no drilling to ride out this down turn and they have between $200-500 per net bbl cash and going to spend (and continue to borrow) billions more for drilling in 2015. Just foreign to me.

[ROCKMAN]

Shallow - "Just foreign to me." Don't give me that crap: when was the last time you used one credit card to make the minimum monthly payment on another card? LOL. The thing to remember is that when you balance a company's PV10 against debt you still don't know how much capex the company invested to generate that PV10. I refer back to the company worked for in the 70's boom: by 1981 they had a PV10 of around $45 million. Wouldn't you like your ops to have the same PV10? OTOH the company had spent about $550 million to create that PV10. Remember this is the company that floated a $100 million bond towards the end just so they could keep the lights on a little longer. A bond they were eventually unable to pay a $ of interest on let alone any of the principle. And when they were liquidated under bankruptcy the bond holders still didn't get their entire investment back: accounts payable always get the money first before shareholders and debt holders.

[shallow sand]

Just foreign to me personally. Have never had anyone try to make a crap loan to me, at least since I quit getting a credit card solicitation or two every day prior to 2008. Probably because I never have sought a crap loan because I fully intend on paying them back This thing to me looks exactly like the housing bubble. I was not a part of that either. Houses in my area never spiked much because there just aren't that many people here.

I actually am a little too young to remember what kinds of crazy energy loans made in the early 80s, was still in school then. I remember the price being high and dropping off a cliff, but didn't own and interest in anything then so didn't see some of the crazy stuff I am sure you saw.

I am also sure much of the lending on shale is simply due to its magnitude. Banks want to make $100+ million loans. Also, if you float a 5-8 percent bond issue when CDs pay 1/2 percent you will get a lot of takers.

I truly hope the shale guys make it, because that will mean our investment is also in good shape. I think a lot of the shale will be in trouble before we are, but I don't look forward to finding out for sure. And I don't appreciate that reckless lending is contributing to a bigger bubble in the oil patch, which will cause the carnage to be more than it needed to be. I can understand bank and sec regulators forgetting the 1980s oil boom but not the 2000s housing boom.

[ROCKMAN]

Shallow - yep...I gave up credit cards a long time ago. Now it's strictly debit cards.

There's something else to consider about corporate debt. As I mentioned before if the big companies get hammered by low prices the banks might not be too concerned about their loans. A company as large as Chesapeake is very unlikely to go bankrupt even if the shales crater. They'll be acquired by a stronger company. That acquisition might include some cash, a lot of stock but will always include acquiring the CHK debt. Changing ownership doesn't get rid of that debt...it's secured. Which for companies like ExxonMobil is no problem. There have been $billion corporate acquisition where not a single $ changes hand: just swap some stock certificates and sign off on that debt.

OTOH if you and I were to borrow ourselves into a hole we can't escape because our net asset value wouldn't be great enough to attract someone to buy us out. All we could do is take the pictures off the wall and head to the house. LOL. It was said a long time ago in the oil patch: owe the bank $100k and they got you by the balls. But owe the bank $100 million and you have them by the balls: they'll be very cooperative when it comes to helping you weather a financial sh*t storm. You and me? They would just cut our financial throats and leave us in a ditch to bleed out. LOL.

[shallow sand]

I think that may have been HL Hunt himself and I think his version was, "owe the bank a thousand bucks and it's your problem, owe the bank a million bucks and it's their problem" depression era quote that has proven out true ever since. Even better version is when the banks owe too much, then it's the taxpayers' problem.

I am surprised majors haven't started trying to snap up some bargains. Hope it isn't because they are waiting for an even lower price.

[ROCKMAN]

Shallow: "I am surprised majors haven't started trying to snap up some bargains." Give it time. The big corporate acquisitions don't happen when the strong companies decide to buy. It happens when the shareholders of the weak lose faith in the recovery of their stock price. Then they'll take a premium offer a bit above the current market price. So buying opportunities are not a function of a specific oil price per se: they are very company specific. The lower the expectation for a company to recover share price the more venerable they are.

Some of the shareholders of Baker tried to hold out against Halliburton. Then Halliburton started making noises about doing a hostile take over: not controlling all the stock but acquiring enough to gain board seats and some control. That threatens the holdout shareholders with the prospect of selling at lower prices that Halliburton's original offered. It's no different then calling some one you think might be bluffing in a poker game: sometimes you win... sometimes you lose. In past busts I've seen the management of a weakened company use a variety of methods to retain control for more than 2 years after their financial hemorrhaging began. I once worked with a management team that actually intentionally damaged their company's financial position to fend off a hostile takeover bid. One way: they did a $100 million bond (at 11%) offering explaining it COULD be used for a variety of capital projects. And once the monies were raised they used most of to to pay off an 8% bank loan. Got that: used money they were going to pay 11% for to pay off a loan they were paying 8% on. They were able to keep their jobs for another 18 month but eventually were taken over. And yes, in several years the company was liquidated in bankruptcy court and was never seen again. Bit not before someone bought the bond for $55 million and got $11 million/year in interest bleeding the company assets until he recovered his $55 million. Of course the $100 million principal couldn't be paid back so he used that $100 million loss to offset his other incomes and saved a sh*tload on his taxes.

Any wonder why I had little interest in working for a small cap oil company after that experience? LOL. Like was said once: if you watch them make sausage you might never eat it again.

[shallow sand]

Now that oil has fallen another $10 or so since I started this thread, I wonder where the shale drillers will be on exploration budgets for 2015. The 40% reduction in permits took me by surprise, although I agree more months are needed to see what the real trend is.

Many companies' equity prices have dropped in the $0-$5 dollar range with WTI at $65. If PV-10 were calculated using the current strip, their PDP would have a rather stunning drop, I bet. Also, if the $$ is cut off from the banks and credit markets for CAPEX, the PUD PV-10 should drop to almost zero. Note that a large chunk of PV-10 is PUD.

The $64,000 question is whether demand has tanked for good, or whether $2 gasoline will cause it to spike. If WTI stays here or below all of next year, I think both conventional and shale drilling will drop off a cliff.

We have heard rumors of service company layoffs in our area. I think conventional reacted first to the falling price, probably because it was being financed with more cash flow and likely smaller and more conservative companies.

The one possibility is that service rates will come way down too. Saw a CNBC report that average Bakken well cost was up of $3 million since 2010. Assume a lot of that is due to longer laterals and more frac stages. Also noted that LOE had doubled. Would assume, however, that LOE will continue to climb if drilling slows dramatically. LOE per bbl function of production rate on these, plus switching over to rod pump.

So many questions, but I am starting to think the US cannot grow production to 10 million bopd at sub $70 WTI, which looks like where we were headed before the crash.

If anyone has any links to the effects of price drop on shale driller PV-10, please post a link. Thanks!

[shallow sand]

Interesting that US production has grown, maybe, since December.

Also interesting that most shale companies will have a long term debt to PDP PV10 ratios of over 100% at year end. Some will be over 200%.

For example, in its 2014 10K, CLR indicated PV10 all categories fell from $22.7 billion to $9 billion based on 2/15 product prices. Long term debt will approach $8 billion at year end. 1/2 of 2014 PV10 is PUD.

CLR is stronger than most.

Houston, we have a problem.

[ROCKMAN]

shallow - I think you don't drill much...right? Remember the time lag from a rig initially spudding a well and first production: up to 6 months...sometimes longer. so we are just beginning to see the effect of the rig count drop 6 months ago. By Dec we should have a good sense of where the curve is heading.

[shallow sand]

ROCKMAN. Yes, we do not drill much, zero this year. I did say maybe, because I feel that EIA has been too high with their estimate for TX and NM production growing about 700K bopd since 9/14.

I agree with you that for the types of wells that caused growing US production 2010-2014, there is a big lag time.

What do you think about the upcoming borrowing base reviews this fall? Do you think banks will look at the big reserves write downs coming in early 2016 and pull back, or will they continue to let these guys borrow more money to drill more wells at $50 WTI and $2.75 gas?

I assume the shale guys will get the engineers to monkey around with expenses enough that reserves/PV10 will not take the 50%+ hit it should take compared to 2014 when $94 WTI and $4+ gas was used?

I know you are critical of SEC reserves reports. However, we do not have much more to look at than those. When things went to hell in the 1980s, where was long term debt to PDP PV10 ratio for the companies that went BK. There are many that will be over 200%, I.e. long term debt double PDP PV10. Isn't that a sign of financial peril?

Or do we throw out the rules with shale oil because it is "revolutionary"?