From Rune’s first ‘Red Queen’ post: The reference in the title to The Red Queen from “Alice in Wonderland” by the English author Charles Lutwidge Dodgson (perhaps better known from his pseudonym Lewis Carrol) who was an author, mathematician and logician, is deliberate to create associations with The Red Queen’s statement;"It takes all the running you can do, to keep in the same place".
This post is an update on Light Tight Oil (LTO) extraction in Bakken based upon published data from the North Dakota Industrial Commission (NDIC) as per March 2015.
Extraction developments of LTO from Bakken may be followed by county, formation, vintage of wells, and one important source to understand the developments are coming from studying the developments by companies. Holding this up with companies’ financial statements (10-K and 10-Q) is an invaluable source about the companies, their financial capabilities and their strategies. This information is paramount to understand the developments in LTO extraction from Bakken and provides valuable insights into what to expect of future developments.
To get some understanding of what will drive future developments, it is helpful to look at individual companies.
Amongst all the companies operating in Bakken I selected for this post to present a closer look at 3 of the biggest companies in Bakken; Continental Resources, EOG Resources and Whiting Petroleum.
These 3 companies were found to be representative for several of the companies with regard to a range of variation in quality of wells, development strategies, use of debt, asset sales and not least what their responses to oil price changes may reveal.
- For Q1 – 15 the companies involved in LTO extraction in Bakken used an estimated $4 Billion (CAPEX) for well manufacturing and an estimated $2.3 Billion was from external sources, primarily from equity and asset sales and assuming more debt.
The “average” well with around 90 kb [90,000 barrels] of flow in its first year is estimated to have an undiscounted point forward break even (that is a nominal break even with 0% return for the well) at around $60/Bbl (WTI).
- The break even price increases with increases in the return requirement.
- This analysis shows that the companies have deployed different strategies as responses to the decline in the oil price, which will affect future developments in LTO extraction.
Since September 2014 and as of March 2015 LTO extraction from Bakken(ND) has flatlined at 1.12 – 1.16 Mb/d.
With an oil price below $50/Bbl (WTI) the companies involved in extraction of LTO in Bakken will face several financial challenges.
NOTE: Actual data used for this analysis are all from North Dakota Industrial Commission (NDIC). For wells on confidential list, data on runs were used as proxies for extraction.
Production data for Bakken, North Dakota: Monthly Production Report Index
Formation data from: Bakken Horizontal Wells By Producing Zone
Data on wells kindly made available by Enno Peters’ excellent and tireless work.
With the decline in the oil price some of the Bakken LTO producers went counter cyclical and took on more debt and sold equity and assets in a bid to sustain/grow oil production. The logic at work here is that any decline in prices should be made up by volume, thus profitability considerations were sidelined.
The decline in the oil price and the aggregate increase in the use of debt made the leverage in March -15 reach new highs.
The LTO Break Even Flow
At $60/Bbl (WTI) it is estimated that wells with a total 1st year extraction of 90 kb is likely to make a profit and returns improves with increased flow.
At $100/Bbl (WTI) it is estimated that wells with a total 1st year extraction of 55 kb is likely to make a profit and returns improves with increased flow.
Table 1 illustrates how the companies responded to the decline in the oil price and it shows the mismatch between total number of wells, wells added during Q1 – 2015 and portion of total extraction. Whatever metric for efficiency is applied, EOG comes out on top.
EOG came in early and they also have, by a wide margin, the best of the wells of the companies presented, refer also figure 7.
There is something about watching those who moves in and out early. EOG may be one to watch.
Continental went counter cyclical with the decline in the oil price and continued to grow LTO extraction.
The average well for Continental does not make commercial sense at present oil prices, which means only a few wells have the prospect of becoming profitable.
Of the companies presented EOG has by a wide margin the most productive wells and so far their wells will be profitable at present price levels if the productivity trends from 2014 are continued.
It is worth noting that EOG adjusts their well manufacturing with movements in the oil price. This strongly suggests that EOG is in the LTO business for successful value capture (profitability).
The earliest of Whiting’s wells was more productive than the average, while wells for 2011, 2012 and 2013 were poorer and so far the total for wells of 2014 vintage has performed close to the average. At $60/Bbl (WTI) these wells should make some profit.
This study shows that the companies involved in LTO extraction in Bakken respond differently to movements in the oil price.
As LTO extraction is heavily front end loaded, with most of its extraction early, a sensible strategy would be to adjust the scope of well manufacturing with price movements.
Some companies are clearly value captures that besides having some of the most productive wells also adjust their well manufacturing with movements in the oil price.
It appears strange that of the presented companies the one with the poorest wells, which likely are unprofitable at $60/Bbl [WTI], responded to the recent price decline by growing its total extraction. This may reflect a bet that the oil price soon will make a strong rebound.
Any forecasts for future developments in LTO extraction from Bakken should consider the different strategies amongst the involved companies, their attitude for value capture and their future access to capital, being the combinations from cash flow from operations, equity and assets sales and their capacities for assuming more debt.
When it comes to how well productivity develops, we just have to await actual data for LTO extraction and keep a watchful eye on the developments in water cut and Gas Oil Ratio (GOR).
Red Queen card teaser image via lordferguson/flickr. Creative Commons 2.0 license.