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What Happens To US Shale When The Easy Money Runs Out?

What Happens To US Shale When The Easy Money Runs Out? thumbnail

Today we will take a look at both Whiting Petroleum (WLL) and Continental Resources (CLR) as far as their Bakken economics. Overall the numbers will show that, despite claims of low cash costs per MBOE ($16 or so for CLR) and high IRRs on $60 WTI, the facts say otherwise. In addition, the analysis will show how very high depletion rates combined with falling rig counts spells trouble for Bakken production growth despite better efficiencies per well. The analysis will be based on April presentations of both companies from which the graphs below are taken. I should note these economics are not much different from Eagle Ford, the second most prolific addition to US production growth in past years.

Firstly one must understand that the easy money via QE from the Fed and zero interest rates allowed many shale players to burn free cash flow while showing operationally net of capital expenditures (which were funded by cheap flowing monies via FED) cash generation. To be clear, that model is now broken as the era of free Fed money appears to waning as both QE, and soon, zero rates become a thing of the past. The cost of capital is no longer falling but is now rising through higher bond yields and/or lower stock prices.

The madness that is occurring in financial markets on discounting these events despite very weak, almost recessionary economics, boggles the mind. Despite the consensus of both ending, the realities are that FED will eventually reverse course on both in the realization that they can’t talk up economic growth any longer and easy money policies finally get recognized as failures. But that may occur only after another equity bubble bursts and in either case shale producers may find that equity markets are no longer going to fund production. In the end what’s likely, regardless of outcome, is that funding will be more difficult for shale producers who must constantly run in place to replace huge depletion rates.

All year we heard that the 50% reduction in rig count didn’t matter as producers focus on lower cost most prolific areas. Yes producers are getting more efficient as they are able to increase rates of production. The chart below from WLL’s April presentation depicts this. However, if you are able to increase the rate of oil flow by 27% over a 90 day period while depletion runs at nearly 70% as your rig count declines, how does one grow production, never mind maintain it? By WLLs own math, flow rates decline from 1,777 to 543 in 90 days! So it’s clear the efficiency is more than offset by depletion and so, as time passes, as the rig count declines, so will production.


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The same can be shown with CLRs presentation although it shows depletion at 20% for first 30 days, but if extrapolated out to 90 days it would be similar to those depicted by WLL at 90 days.


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Further, the efficiency up lift only offsets some of the depletion effects, as CLR claims 30-45% increases over a 90 day period as depicted below:


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The huge IRRs at $60 oil have to be understood as they are excluding the need to continually replace production through huge capital expenditures. Looking at WLL’s financial statements this is readily understood.

CF from operations in 2014 was $1.8 billion. However, to perpetuate production they invested nearly $3.0B resulting in negative free cash flow. The same is true with CLR as it generated $3.35B in cash from operations but needed to invest $4.8B to maintain and grow production. It should be noted that these states are much worse on $55-$60 WTI.

We recently discussed how the Saudi strategy does not appear sound on assumed Brent prices and production rates. However, it should be noted that easily accessible money is needed to grow production and if it ceases then it will result in massive restructuring for producers and declines in production. And this may be the Saudis ace in the hole if the era of access to easy money is ending. One way or another it may be that the E&P companies who are hoarding cash will be the last shale player standing to take on Saudis in the end. Understanding this is critical to refute the calls by EIA and others what shale will continue to grow in the years to come. We are most likely seeing US production peak unless producers see much higher prices and/or easy money continues. As far as investing goes, highly leveraged companies should be avoided and ones in better financial shape considered first, as they will be the ones rising from the ashes.


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By Leonard Brecken of

13 Comments on "What Happens To US Shale When The Easy Money Runs Out?"

  1. shortonoil on Wed, 22nd Apr 2015 2:04 pm 

    The shale industry has now issued more that $300 billion in high yield junk bonds; some of which are paying almost 15%.

    What could possibly go wrong?

  2. BobInget on Wed, 22nd Apr 2015 2:05 pm 

    Jet fuel Up 12./2%
    Imports, higher still.
    Totals up 5.% over last this period last week.

    Summary of Weekly Petroleum Data for the Week Ending April 17, 2015
    U.S. crude oil refinery inputs averaged 16.0 million barrels per day during the week
    ending April 17, 2015, 230,000 barrels per day less than the previous week’s average.

    Refineries operated at 91.2% of their operable capacity last week. Gasoline production
    increased last week, averaging about 9.8 million barrels per day. Distillate fuel
    production decreased last week, averaging about 4.8 million barrels per day.

    U.S. crude oil imports averaged about 7.8 million barrels per day last week, up by
    617,000 barrels per day from the previous week. Over the last four weeks, crude oil
    imports averaged over 7.6 million barrels per day, 0.9% above the same four-week period
    last year. Total motor gasoline imports (including both finished gasoline and gasoline
    blending components) last week averaged 737,000 barrels per day.

    Distillate fuel imports
    averaged 255,000 barrels per day last week.
    U.S. commercial crude oil inventories
    (excluding those in the Strategic Petroleum
    Reserve) increased by 5.3 million barrels from the previous week. At 489.0 million
    barrels, U.S. crude oil inventories are at the highest level for this time of year in at least
    the last 80 years. Total motor gasoline inventories decreased by 2.1 million barrels last
    week, but are above the upper limit of the average range. Finished gasoline inventories
    increased while blending components inventories decreased last week. Distillate fuel
    inventories increased by 0.4 million barrels last week and are in the middle of the average
    range for this time of year. Propane/propylene inventories rose 2.0 million barrels last
    week and are well above the upper limit of the average range. Total commercial
    petroleum inventories increased by 9.2 million barrels last week.

    Total products supplied over the last four-week period averaged 19.2 million barrels per
    day, up by 5.2% from the same period last year. Over the last four weeks, motor gasoline
    product supplied averaged over 9.0 million barrels per day, up by 4.0% from the same
    period last year. Distillate fuel product supplied averaged over 3.9 million barrels per day
    over the last four weeks, down by 0.2% from the same period last year. Jet fuel product
    supplied is up 12.2% compared to the same four-week period last year.

    Poster’s note:
    The key here to look at is Imports.
    America is being flooded with imports, crude and finished product.
    What can’t be covered up are consumption numbers that show increases every week this year, (over last).

  3. joe on Wed, 22nd Apr 2015 2:10 pm 

    Its likely that the Saudis are going to let the markets work. There is an equilibrium price where they are not going to take pain in their budgets and shale can exist in some form. That said, shale clearly needs a high price. Talk of ‘efficiency’ can only make sense in terms of turnaround from one well to another. That implies an economics of quick money and quick profit. Historically its the economics of boom and bust in the classic Marxist model. In the last 25 years we have seen at least 3 major recessions, each one we ‘recovered’ from because the Fed pumped in more money, globalisation spread industrialisation to Asia and Arabs bought dollars to fund the new energy markets. I think we are finally seeing a market that has matured, its got enough dollars, Europe doesn’t trade in dollars any more, Asia is moving away from it. In a real sense we have finally moved on from the chaos of 2 world wars and the US is finding it hard to make space for everyone. As for oil the logic is clear. If the world has enough dollars its implied there they have enough oil, therefore shale oil might be pointless in a global case. Of course the US’s answer to demand is to create the biggest trading bloc in history, ie with the EU. One imagines the deal will clear, that the US opens its markets to fair competition with the EU, the EU does the same with a view to more open borders and immigration both ways. How well its going to work in practice, would the US hold its nerve if for example Silicon Valley moved to a tax haven like Rep of Ireland? Anyway I digress. Peak Oil/Peak Dollar/Peak Demand, they all represent the same equation in the end.

  4. BobInget on Wed, 22nd Apr 2015 2:28 pm 

    If we continue higher demand oil we are going to need shale, Arctic regardless of risk or expense. Shortonoil’s tacit predictions of disaster should be proven correct were it not for
    demand driven, insatiable need to find oil with drone launched missiles.

    AS pointed out on countless PO posts, except for Canada (oil sands), ephemeral, expensive shale, ultra deep GOM and ocean drilling, we got bubkus for oil going into 2017.

    In an attempt to weaken Ecuador, Venezuela and Iran, genius Saudi and US strategists gave China the most precious gift of all, long term oil
    super-supply on the cheap.

    Ecuador and Venezuela’s oil to China.
    Iraq, Russia, Iran, Libya, Nigeria, basis of ‘new’ OPEC….

    The good news?
    As long as ‘The Kingdom’ hangs together, we have Saudi Arabia.
    The Bad news?
    Same as good news.

  5. shortonoil on Wed, 22nd Apr 2015 3:40 pm 

    Considering that oil prices are down 50% over a year ago, it doesn’t appear that US consumption is keeping up. Gasoline consumption is going no where fast:

    Of course, if you don’t have any money, it doesn’t make any difference how cheap it is!

  6. shortonoil on Wed, 22nd Apr 2015 3:43 pm 

    Check, US then graph to get the graph.

  7. justeunperdant on Wed, 22nd Apr 2015 5:33 pm 

    Canadian banks on the hook for hundreds of millions to companies caught in oil carnage

    Canada’s biggest banks are on the hook for at least US$478 million of the US$26 billion owed to U.S. oil and gas firms that bought protection against plunging crude prices.

    Wait until the oil and gas firm use their protection and demand payment. I am curious to see if this will trigger a cascading default of bank. I will be curious to see what is the leverage associated with these CDS.

  8. BobInget on Wed, 22nd Apr 2015 9:31 pm 

    Let’s get one thing clear.
    Oil ain’t going out of style.

    Just so’s we make sure all are on the same page, can we agree?
    1) Oil is the world’s most traded commodity.
    YES or NO ?

    2) Without oil, enough food for seven billion people can’t be grown, if grown, can’t be shipped. if shipped, food can’t be stored, if stored, food can’t be cooked, if cooked food can’t be put in little plastic containers, put in the back of a warm refrigerator and forgotten.

    3) At the present time, an oil free world is much quieter. No trains, planes, Jake Brakes, two cycle chain saws, leaf blowers, loud music or pointless aircraft carriers.

    4) Without oil how should we make napalm for burning villages. But hey, if those villages aren’t resisting giving up their oil, we really needn’t bother burning them. Transporting US marines
    seven thousand miles to ‘protect our oil’ will no longer ‘be a thing’.

  9. Perk Earl on Thu, 23rd Apr 2015 1:03 am 

    I’m so curious to see what happens Boninget, as those things you list bump up against the cascading defaults of diminishing returns. Hey, we’ve got front row seats-lol!

    Will be really difficult to comprehend to post bottleneck generations to stare up and play on abandoned, obsolete, rusting aircraft carriers. “Why was it built so big and what did it do?”, they’ll ask.

  10. Davy on Thu, 23rd Apr 2015 5:56 am 

    Bobby said “Without oil, enough food for seven billion people can’t be grown, if grown, can’t be shipped. if shipped, food can’t be stored, if stored, food can’t be cooked, if cooked food can’t be put in little plastic containers, put in the back of a warm refrigerator and forgotten.” Good one Bobby!

    Let’s make this clear to our friends of all colors greenies, brownies, AltEes, and Bautopians. There is nothing we can do to change that oil food nexus in a timely fashion with 7BIL people and growing. This is where the disconnect is with all sides. Greenies think we can decarbonize and not starve. BAUtopians, think we can decouple from oil and grow without any issues with food.

    BAUtopians have little concern over food. Food is not even on the radar screen for greens or browns. Greens think we can go AltE in a breakout from carbon energy. These AltE’s can then self-replicate. I am asking the greenies what about industrial AG that is absolutely required for 7BIL people and growing. Industrial AG equals oil AG. I know I had a 1000 acre corn and soy farm in 2000. I am doing permaculture now with management intensive grazing. Permaculture cannot even begin to approach what industrial AG produces. Permaculture could never be transitioned to in time.

    All I see from the numb nut academics, stink tanks, and the UN agencies is reports that population is growing to such and such and food needs to grow to such and such. You never read these numb nut say food production can’t grow much more so population will shortly hit a brick wall. Then we have the evil GMO wonks saying their technology will save the world. You have population denialist like the Makster who think if we quit eating meat his Asia can grow another 3BIL by eating grain. I think he said something one time how the ships from Asia can carry grain instead of plastic to America.

    My point is as the oil age winds down so will the food revolution that was allowed. This will work in tandem with the amazing ways we utilized water that just now have hit diminishing returns. Oil, Food, and water are under stress as the population and the consumption trends of that population grow. What could be more of a disconnect then that. Take that disconnect then ask yourself how the BAUtopians can claim all is well. How can the greenies preach their shiny, clean, and smart AltE world? It is these things that cause me to preach doom.

  11. shortonoil on Thu, 23rd Apr 2015 8:11 am 

    When the petroleum industry can no longer make money producing oil it will stop. At $56/barrel most of the industry is no longer making money. The average producer has a production cost that is far higher than $56, and prices are not likely to improve in the foreseeable future. In this low price enviroment every producer in the world is producing flat out just to stay alive. Cash flow has become the new King; profit an after thought.

    Petroleum has reached its maximum value to the world’s economy, and that value is declining as every new barrel is added to the world’s accumulation of total oil produced:

    Since Drake sunk his well in 1859 the world has pumped about 1,440 Gb out of the crust of the earth. Oil has certainly been popular, and it is not likely to go out of style. At $56/barrel it is, however,very likely that it will simply go out of business!

  12. Nony on Thu, 23rd Apr 2015 4:00 pm 

    Fracklog article. Don’t listen to the Rock. He is often wrong. He just likes to pump himself up. Article is good with lots of quotes from industry people. People who do more shale than Rock’s old AC stuff.

  13. BobInget on Fri, 24th Apr 2015 2:06 pm 

    Yes, I admit, shortonoil is bang on.
    IF oil stayed $56 or below, too few oil companies could stay in business.

    A Question remains, what then?

    How will humans deal with Climate Changes?

    Feed ourselves?
    Humanly limit population growth?

    I’ll guess. Like junkies, hungry parents, we will spend most days finding and preparing food and shelter. Nothing much else gets done.

    Shortonoil, is unrelentingly American-centric critiquing one planetary commodity.
    I’ll expand.

    When USA invaded Iraq for the second time
    we kicked off a series of events that reverberate
    this hour. The notion that America should benefit, (low cost oil) from premature deaths, dislocations of millions in Afghanistan, Iraq, Syria now Saudi Arabia and Yemen and Sudan is ludicrous.
    Justice, history, simply doesn’t work that way.


    Inevitably, oil prices will indeed rise beyond affordability… But, not for everyone.
    Populations with vast gas and oil reserves, manageable climates, will survive despite
    great in migrations.

    While effects of Peak Oil and Climate Changes
    are subtile, we are still able to deal with them because oil pricing remains artificially low.

    If a single missile, fired in retribution, finds it’s Saudi Arabian mark, our world changes overnight. (Cutting saltwater supplies for flooding oil wells, for instance)

    What are the chances?

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