[ROCKMAN]

shallow - "What do you think about the upcoming borrowing base reviews this fall? " Not this fall...reserve base is calculated by the bank engineers (who don't give a sh*t what the SEC numbers might be). And they have been slicing borrowing bases with an ax for months now. The pubcos won't broadcast what the banks have already done to them until their SEC fillings require it.

Even without redoing the physical oil recovery analysis the banks adjust those borrowing bases on a daily base just with respect to oil prices. And the banks do use those hedges to soften the blow. But when those hedges expire the banks will just as quickly cut the heart out of those borrowing bases. Folks should understand that even the SEC reserve reports use a price platform to calculate reserve VALUE in addition to VOLUME.

And a little known fact: bank engineers also add haircuts to reserve values based on very personal valuation of a particular operator. An additional "fudge factor" per se. Hell, I've worked in companies where our own engineers had different fudge factors for each geologist: if they thought the geologist did good work they might take 90% of his numbers. If they thought he wasn't very competent they might only use 50% of his numbers. Of course if a geologist knew his numbers would get a big haircut he would inflate them even more.

Really. LOL.

[hvacman]

And a little known fact: bank engineers also add haircuts to reserve values based on very personal valuation of a particular operator. An additional "fudge factor" per se. Hell, I've worked in companies where our own engineers had different fudge factors for each geologist: if they thought the geologist did good work they might take 90% of his numbers. If they thought he wasn't very competent they might only use 50% of his numbers. Of course if a geologist knew his numbers would get a big haircut he would inflate them even more.

re: engineers and hair cuts. I frequently give credibility- haircuts to information posted here on the forums, the hair-cut factor depending on past experience with the post's author:)

In my credibility-world, some of you are Fabio and some look like Yule Brenner.

[shallow sand]

Syn asked that I post information that I posted on peakoilbarrel.com.

As you may or may not know, the office of the comptroller of the currency has loan guidelines for banks making loans to upstream oil and gas companies. Loans are in the form of a borrowing base, where the collateral consists primarily of the oil and gas assets.

I have been making a big deal about long term debt to PV10. The present value of the future cash flows of a company's oil and gas reserves, discounted at 10%, is a common method for valuing reserves for collateral purposes.

The OCC guidelines state that a range of 50%-65% of the discounted value of the company's future cash flows should be the maximum borrowing base determined by the bank, or bank consortium . Furthermore, PDP reserves which have been in production a minimum of six months are preferred, and if new PDP, PDNP or PUD reserves are included in determining borrowing base, they should be further discounted. Borrowing base is typically determined semi annually, also typically in the spring and the fall.

I realize that banks have price decks that differ from SEC PV10. I also realize that banks may not discount at 10%. I have heard 9% used due to historically low interest rates. Therefore, I am fully aware that bank's value determinations differ from SEC PV10.

I looked at the 2014 10K for the 16 US based publicly traded companies with rigs still drilling in the ND Bakken. PV10 for SEC purposes was calculated using a WTI oil price of $94.99 and gas price of $4.30. We know how much prices have fallen.

At least two companies disclosed what the price crash did to its companywide PV10. Continental Resources disclosed that utilizing pricing from 2/15 reduced PV10 all categories by 61%. Newfield Exploration disclosed that utilizing WTI of $60 and natural gas of $3.50 reduced PV10 all categories from $6.2 billion to $3.7 billion.

I took SEC PV10 all categories for those 16 US based public companies, divided by two and then calculated the long term debt to PV10 ratio for each, on a company wide basis. My assumption is that the first six month's pricing has cut PV10 by at least half.

XOM, of course, had the best long term debt to PV10 ratio, only 11%. Keep in mind, also, they are one of the few remaining integrated companies. They have tremendous cash generating assets besides upstream. In summary, they are rock solid.

The only two other companies with long term debt to PV10 ratios under 50% were EOG and Abraxas Petroleum. ConocoPhillips, Hess, Marathon Petroleum and Continental were all between 50-75%, with Continental likely now being above 75% given the company has added over $1 billion more long term debt in the first 4 months of 2015. A few other companies were in the 75%-99% range. The rest were over 100% long term debt to PV10, with two being over 200%.

My point is merely that low oil prices will cause massive write-downs at the end of 2015 and should cause large borrowing base redeterminations. As ROCKMAN states above, with the weakest companies, those redeterminations have already occurred.

I think it is noteworthy that as few as 3 of the 16 US based public companies in the ND Bakken would qualify under OCC guidelines to have all long term debt carried by banks. Keep in mind I used PV10 all categories, and only adjusted by 1/2 to take into account the price crash. I did not adjust further for PDNP or PUD, as the OCC guidelines indicate should be done.

Another poster at peakoilbarrel.com suggested substituting PDP PV10 for property, plant and equipment, which I found to be a great suggestion. If doing so causes net worth of the company to be negative, trouble is ahead without an increase in oil/gas prices. If PDPV10 is less than PP &E (less accumulated DD&A) value has not been created. It would be like building apartments for $400,000, that depreciate at $10,000 per year, but in year 5 only appraise for $250,000 instead of $350,000 or more, due to a low capitalization rate. With apartments, there is some time to wait out the economic downturn. With rapid decline shale oil, there is not.

Shale may tout recent efficiencies, but those are not enough to counter the combination of a tremendous price crash, prior inefficiencies, large borrowing, and high decline rates. These low prices could last several years. If they do, even names like Hess, ConocoPhillips and Marathon Oil could be in trouble.

I know I don't understand all the high finance stuff, but I do know our stripper wells produced 1/10 the net income the first six months of 2015 that they did in 2014. Thankfully, no debt repayment is required on our stuff. I am surprised there was any income at all. Several leases were underwater. Further, little CAPEX now will bite us in the butt later.

ConocoPhillips burned over $2 billion in the first 90 days of 2015. Many others burned 1/2 to 1 1/2 billion dollars. There is a lot of debt out there, and it is being added to now.

For some perspective, I looked at long term debt to PV10 for Whiting and Continental in 2003. Oil averaged $28 and gas averaged $4.80. Each had long term debt to PV10 in the 25-30% range. Now, with WTI of $50 and gas of $2.50, these ratios are in much worse shape. Whiting is over 100%.

On a final note, if you think oil cannot stay in this area for years, just look at gas. I was stunned that gas averaged $4.80 in 2003. We are in a commodity bear market, and the dollar is strong. We have sold oil for $8 and corn for $1.70. We didn't think those prices made sense, but that is the way it is with commodities.

The middle of the USA was booming the last ten years, except for about 8 months in 2008-2009. Now may be bust time.

[ROCKMAN]

Terrific piece by shallow. I'll add a little side bar expanding on a point made that might not have been noticed: "Several leases were underwater. Further, little CAPEX now will bite us in the butt later." With all the focus on the shales, including their high decline rates, not much attention has been paid to a very stable and very slowly declining production base: US stripper wells. Shale well can make 100's of bopd initially. But that doesn't change the metric to any degree at all: the average US oil well produces less than 15 bopd.

Understand that most stripper operators are not public companies. They don't need to keep up appearances for the share holders. IOW there's no reason for them to piss down someone's leg and call it rain. LOL. And shallow, like most stripper operators, will suffer a bit of negative cash flow to at least avoid the expense of plugging a well, but only holds on so long. The point is that many stripper wells would have been plugged years ago had we not had the higher oil prices...thousands if not tens of thousands. But now those prices have cratered. Those operators will hang in for a while but not indefinitely. IOW thanks to those higher oil prices there has been a lag in stripper plugging. So at the same time thousands of high rate shale wells won't be added to the mix as has been the the case for years, many thousands of stripper wells will also be removed from the total. No way to make a credible guess on that magnitude IMHO but if prices stay low for an extended time think about losing 50,000 striper wells in the next couple of years: 50,000 X 10 bopd/well = a loss of 500,000 bopd of US oil production. And again remember that those reserves were declining only a few % per year. Now add to that the shale wells that have reached or nearly reached stripper rates: they'll disappear also. This is particularly true in the Eagle Ford trend where pumping and water disposal costs are significant.

So while credit lines get trashed and fewer new drilling efforts will produce less NEW oil we'll see a loss to some degree of OLD oil that had only been able to sustain itself thanks to the high oil prices that caused the drilling boom.

[Synapsid]

Thank you shallow sand--this message needs to be got out over and over--and thanks ROCKMAN for expanding on it.

What a team.

[ROCKMAN]

Speaking of losing value here's the loatest word from the largest foreign US shale player...BHP:

The size of BHP Billiton Ltd.’s $2.8 billion writedown for its U.S. shale assets took some banks by surprise: at least two thought it was too small. After the latest charge, Melbourne, Australia-based BHP values its U.S. onshore business at $24 billion. That’s more than 40 percent higher than what analysts at JPMorgan Chase & Co. think it is worth and over twice Citigroup Inc.’s estimate. The producer said its U.S. onshore assets would generate positive cash flow in the year to June 2016 with oil at $60 a barrel, above current prices. “Given the deteriorating conditions of the U.S. oil and gas market, we thought an impending impairment could have been larger,” analysts at JPMorgan including Lyndon Fagan wrote in a research note Wednesday.

After four years of record supply, America’s natural gas output is shrinking as producers retreat from shale amid tumbling oil prices. That’s hurting investments made by explorers including Royal Dutch Shell Plc, Statoil ASA and Total SA, which have impaired more than $15 billion in assets over the past three years. The market capitalization of the 62 oil and gas companies in the Bloomberg Intelligence North America Exploration and Production Index has shrunk by almost half this year. BHP, the biggest overseas investor in U.S. shale, rose 0.7 percent to settle at A$27.08 in Sydney trading after a 0.7 percent decline Wednesday. The shares have lost almost a quarter of their value in the last 12 months. The stock was up 0.6 percent by 11:42 a.m. in London trading. The latest charge brings the total impairments on the company’s U.S. shale ventures to $5.9 billion. While new writedowns were anticipated, investors may be concerned that BHP’s U.S. onshore unit requires prices higher than current levels for the division to generate free cash in the current fiscal year, according to Ric Spooner, a chief analyst at CMC Markets in Sydney. “It’s an interesting insight into where things currently stand for them,” Spooner said by phone Thursday. “It’s also a window into the overall U.S. shale market and the pressures that may be faced by the shale industry if prices do stay below $60 a barrel.”

Spending Cut: BHP spent $20 billion in 2011 on shale assets in the U.S., getting its foothold in U.S. plays in Arkansas, Louisiana and Texas. It booked a charge of $2.8 billion against the Fayetteville shale gas operation in the 2012 fiscal year and a $266 million writedown on its Permian basin assets in the following year. Most of the latest charge is related to the Hawkville field in Texas, the company said Wednesday. BHP said it will cut spending on its U.S. onshore unit to $1.5 billion in the year through June 2016, supporting a development program of 10 operated rigs. The producer spent $3.4 billion on drilling and development in the previous year. Gas production from the seven largest U.S. shale basins in August will fall 0.6 percent from a month earlier to 45.1 billion cubic feet a day, the biggest drop since March 2014, the U.S. Energy Information Administration said Monday in its monthly Drilling Productivity report. EIA estimates have shown supply declines since June.

[sparky]

.
And not much hope of an improvement in production any time soon !

http://uk.reuters.com/article/2015/07/1 ... AY20150717

[shallow sand]

Go over to peakoilbarrel.com and look at my notes on COP PV10. Could it really go from $83 billion in 2014 to $14 billion with $50 oil and $2.75 gas v $94.99 oil and $4.30 gas used in 2014?

I even assume the get 10% reduction on opex and capx.

[ROCKMAN]

shallow - I'm not sure if this is part of the answer you're looking for. I think you understand this but for others: while a PV calculation will produce a lower value due to a lower price it will also reduce the ultimate recover volume. Every well has a life span but it's not based strictly on how much oil/NG it will produce but how much at a certain price assumption. Well A has a PV10 of $30 million at $90/bbl and a PV10 of $18 million at $60/bbl. But at $90/bbl the ultimate recover (and thus its "life span") is reduced from 1 million bbls to 800,000bbls. The 200,000 bbls lost represents those reserves that would be produced due to the operating expense exceeding the value of the oil sales. Which is the essence of the world a stripper like shallow lives in.

But this also gets back to one of my big pet peeves. Some "expert" says the X trend will produce Y billion bbls of oil. A totally meaningless statement if they don't include the price assumption. IOW Y billion bbls of oil at $90/bbl? $60/bbl? $120/bbl? Of course the in place volumetric estimate, recovery efficiency, technology developments, etc. are all part of the calculation. But without knowing the price platform the estimate is based upon there's nothing to agree or disagree about. IOW "Y billion bbls of oil" is a meaningless prediction. When oil fell from $90/bbl to $60/bbls many tens of billions of bbls of "proven" oil disappeared. And yes: when prices increase some of that oil will jump back on to the books. But for now whatever anyone estimated for recoverable reserves from the Eagle Ford, Bakken, Deep Water, etc. that number has been significantly reduced.

[shallow sand]

ROCKMAN and others interested. Thought I would revisit this topic as the last 3 months' oil prices have been very weak, and we are seeing the carnage in the Q3 earnings reports.

SEC PV10 only has two more months to go, with the first day being Monday, 11/2. Oil and Nat. Gas prices will be low 11/2. Dec. 1 looking to be weak also. SEC PV10 in the 2015 10K's, to be released in February, 2016, will be tremendously lower than in 2014. I really do not think, however, that many pay attention to SEC PV10.

Unless OPEC cuts, or there is a major military event in the Middle East, 2016 looks to be a repeat of 2015. I think US shale is getting towards the end of cost cuts due to efficiencies. Will be interesting to see how these companies handle another year.

We are still here and will be unless oil drops into WTI 30s or below for a considerable period of time.

Just lurk here some, have been posting more on Peakoilbarrel. However, it is getting kind of like this site, at least for me. I'm looking for oil information, primarily, and that seems to be pretty far down on many posters totem poles on both sites.

I do appreciate the sites, despite the constant off topic.