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US oil output set for sharp decline

General discussions of the systemic, societal and civilisational effects of depletion.

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Re: US oil output set for sharp decline

Unread postby rockdoc123 » Tue 16 May 2017, 08:54:18

What I'm not really sure is how the finance work behind LTO. I assume operators contract bonds, which have a maturity date and an interest payment. When I try to estimate the gross product of an average well, considering it produce ultimately 200k bbls on average, you end up with $8 millions per well (considering a price of $40 per barrel). When I try to figure out what the costs are (drilling and fracking costs, interest of the bonds, lifting costs), I don't see fat profits here.

But they probably know what they do. I'm just not really sure.


Generally speaking the investments made by companies into unconventional are funded either by equity raised through issuing additional stock or through loans provided by banks. Those loans can take several forms which will have different rates attached. Mezzanine rates often apply to companies that don't have a lot of assets and are quite small and they usually have the highest rates. Preferred rate loans are available to companies who collaterize their holdings and have a high enough EBITDA that they have no problems carrying the loan requested. As an example CHK has substantial holdings (reserves and land) and traditionally have had no problem with carrying charges related to $20 billion in debt (probably annual payments of ~$130 MM or so compared to their $10 billion EBITDA before the price crash).

There isn't any one answer to how profitable LTO is simply because each play is different and within each play there are better producing areas than elsewhere and also each company is in a different position in terms of whether they are producing lots of wells at predictable long term rates or whether they are a startup trying to drill new wells and bring them on production. The term break even cost refers to an all in measure of what it takes price wise to justify full exploration and development of a barrel of oil. It is an average measure over a given play (generally as used by the banks although some companies will calculate it based on their own holdings) so if the current price is higher than the average breakeven price for a given play you can imagine that "on average" those involved in the play are in the positive NPV space. Of course some companies won't be and others will have done much better due to all of the above reasons. To really understand this properly you need to go to the SEC filings for public companies chasing unconventionals. There is a bit of detective work involved but generally it is easy enough to tell if they are turning a profit based on just production alone (you need to ignore one time write downs, asset sales etc).
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