by shallow sand » Fri 16 Jan 2015, 17:52:50
One thing that I think is a tell (possibly) is how the independent E & P stocks and the oil majors have not fallen as far as one would expect in this rout. For example, we had a one day rally today in oil and all of these stocks shot up significantly. In fact, they are trading much higher than they were a few weeks ago, when the oil price was much higher.
Exxon and Chevron really have not dropped much at all, even though a year of sub $50 oil prices would have to cause an huge hit to their earnings. Neither of them hedge from what I read, so the hit to revenue is immediate.
I have not invested in any shale drillers, but I definitely would not if I thought oil was going to stay sub $50 or even sub $70 for any length of time. Most of them have high levels of debt and no hope of paying it back if we are in a several year period of depressed prices. Yet on a one day rally:
Continental Resources is at $39.69, up from 52 week low of $30.06.
EOG is at $90.31, up from 52 week low of $80.63.
Both of the companies have taken on a significant amount of long term debt to grow very quickly. Both have among the most LTO wells and LTO acreage/locations of any company in the United States, with EOG being strong in Eagle Ford and Bakken, and with Continental having, I believe, the most acreage in both the Bakken and the SCOOP in OK. However, if you look at a top well under current economics, you find the following:
Bakken - Plains posted today $32.44, so assume these large operators are able to obtain $40 per bbl.
Lets assume a Middle Bakken well which produces 200,000 bbl of oil in the first two years, or averages 274 bbl per day. Also, we sell all gas, 600,000 mcf for $2.50 per. I think we would all agree this would be a much better than average Bakken well. Assume .80 NRI, $5 per bbl OPEX, $1 per bbl G & A and 5.5% severance. Won't include the extraction tax, just assume low price makes it go away.
Two year's breakdown
Oil sales $6,400,000.00
Gas sales $1,200.000.00
Less
Severance taxes (5.5%) 418,000.00
OPEX 1,200,000.00
Net $5,982,000.00
In this example I have not included interest expense or any other expenses one would expect. This is a very good Bakken well and we are still short after two years, no time value of money is figured in either. Hard to say what "average" Bakken well costs, but have seen anywhere from $6-12 million and Continental said in 3rd quarter, 2014 average across Bakken and SCOOP was $10 million and they hoped to get it down to $9.6 million.
Now consider that "average well" in Bakken will gross 170-200,000 barrels of oil in five years. Also consider that Eagle Ford, although benefits from much higher wellhead price, typically has steeper decline and lower production rates than Bakken (double the wells but producing less than 1 1/2 times as much). These guys should be in big trouble, however they still have many billion market caps and enterprise value which places per flowing per bbl value over $100,000.
Clearly think market does not think this depressed price will last long.