[JuanP]

The data says exactly what the WSJ recently wrote up....producers are happy just treading water in terms of overall production rates.

But why are they happy with this? Isn't the goal of any business growth?

The goal of most businesses is to make a profit. Making a bigger profit is part of the goal, of course. If that requires growth, then so be it. Growing at the cost of reducing profit can only be justified by future profits.

My family owns a business conglomerate in South America that has been very profitable for 7 generations. We have made a profit every single year without exception. Growth has never been a priority; it just happened naturally when it made sense. We've seen many other companies grow faster than ours in some areas, only to go bankrupt later. Some tried to bankrupt us, all failed.

[Doly]

And no, for E&P's it isn't necessarily about growth. It certainly was in the recent past, but once upon a time there were folks like me, bootstrapping along at from the early 1980's through 2000, living within $20/bbl and $2/mcf and we were just fine with our "staying alive, staying alive, oh oh oh oh stayin' alive!!" business model. And if you recall, that wasn't about US oil growth at all.

Any insight on what keeps shareholders happy these days? Are they still thinking about growth, or what?

[AdamB]

And no, for E&P's it isn't necessarily about growth. It certainly was in the recent past, but once upon a time there were folks like me, bootstrapping along at from the early 1980's through 2000, living within $20/bbl and $2/mcf and we were just fine with our "staying alive, staying alive, oh oh oh oh stayin' alive!!" business model. And if you recall, that wasn't about US oil growth at all.

Any insight on what keeps shareholders happy these days? Are they still thinking about growth, or what?

Give me dividends. Defend my shares with stock buybacks. I like this making cash thing and establishing value, keep doing it.

The collective answer, as expressed in produced volumes, is slight growth via drilling enough to replace decline and keep the pipes full, trying to mitigate the increased costs related to supply chain issues in the service sector. Volume discounts, scheduling in advance, deciding should you own the labor and equipment yourself because you can save money doing it yourself, nothing new here in terms of their reaction. I was more surprised by the "growth at all costs" in a lower price environment than anything that has happened in the past half century.

[Tanada]

And no, for E&P's it isn't necessarily about growth. It certainly was in the recent past, but once upon a time there were folks like me, bootstrapping along at from the early 1980's through 2000, living within $20/bbl and $2/mcf and we were just fine with our "staying alive, staying alive, oh oh oh oh stayin' alive!!" business model. And if you recall, that wasn't about US oil growth at all.

Any insight on what keeps shareholders happy these days? Are they still thinking about growth, or what?

Give me dividends. Defend my shares with stock buybacks. I like this making cash thing and establishing value, keep doing it.

The collective answer, as expressed in produced volumes, is slight growth via drilling enough to replace decline and keep the pipes full, trying to mitigate the increased costs related to supply chain issues in the service sector. Volume discounts, scheduling in advance, deciding should you own the labor and equipment yourself because you can save money doing it yourself, nothing new here in terms of their reaction. I was more surprised by the "growth at all costs" in a lower price environment than anything that has happened in the past half century.

There is another factor as well, interest rates. When the Fed raised rates and stated they are going to continue doing so to fight inflation it takes a lot out of the independent drillers arsenal. Unlike the oil majors now floating in cash due to higher prices the independent small drillers have to borrow cash to finance their risky drilling ventures. The higher the interest rates the less incentive there is for these independents to choose drilling over some other form of investment for their borrowed cash. When borrowing is so cheap it is virtually free you get thousands of small drilling and so on companies springing up from people wit a little experience who are convinced they can cash in by drilling independently. But to do that drilling they need the cash to finance the lease, machinery and salaries of all those involved until the well is producing and they are earning back their investment.

[AdamB]

The collective answer, as expressed in produced volumes, is slight growth via drilling enough to replace decline and keep the pipes full, trying to mitigate the increased costs related to supply chain issues in the service sector. Volume discounts, scheduling in advance, deciding should you own the labor and equipment yourself because you can save money doing it yourself, nothing new here in terms of their reaction. I was more surprised by the "growth at all costs" in a lower price environment than anything that has happened in the past half century.

There is another factor as well, interest rates. When the Fed raised rates and stated they are going to continue doing so to fight inflation it takes a lot out of the independent drillers arsenal. Unlike the oil majors now floating in cash due to higher prices the independent small drillers have to borrow cash to finance their risky drilling ventures.

Not necessarily. The little guys are perfectly capable of bootstrapping production, using the existing high price environment. I never borrowed a dime back in the 80's and 90's, and was able to acquire bankrupt companies, wells that were cast off by companies trying to optimize their footprint, completions of shale wells, the entire smack. And interest rates might matter over a long period of time, but when common CapX payback timeframes for shale wells are in the 12-18 month range, you don't need to borrow (if you do) for very long.

Boomer companies, and the accompanying mentality, along with PubCos, were always the ones who could play financial games with money. Once upon a time, making money through production was how it was done among the independents. Banks wouldn't even loan money to those of us doing shale development back in the 80's and 90's, the SPEE had ana official statement out to banks on the rules of loaning money for this kind of development. It went something like this..."only after production has been established can the revenue stream in shale wells be assured, therefore only after rates are established should money be loaned". That one was the attitude...they would loan AFTER the drilling and completion was done, and AFTER the well was producing. That you could borrow against. And then go into bankruptcy when you couldn't pay up, and I'd collect another company that couldn't manage costs in a low price environment.

[C8]

Not necessarily. The little guys are perfectly capable of bootstrapping production, using the existing high price environment. .

Given todays high prices, I would think that the little guys would be drilling a lot more new wells than they are. How exactly do you "bootstrap" production? Don't you have to borrow somewhere along the way? Are profits just being plowed right back into new drilling? Why aren't there a ton more of new wells?

[AdamB]

Not necessarily. The little guys are perfectly capable of bootstrapping production, using the existing high price environment. .

Given todays high prices, I would think that the little guys would be drilling a lot more new wells than they are.

Drilling requires CapX early, with the amount of payout uncertain based on the wells future performance. Cash up front please. Additionally, little guys can't cut a 8 well pad contract with the service companies for the same kind of volume discount the big boys can.

How exactly do you "bootstrap" production?

Company Net Revenue = $100
Company Net Expenses= $70
Drilling a new Well = $50.

So you save for 2 months, have $60 on hand, and spend $50 on drilling the well. ONE new well in this case, as little guys are just that...little.

Don't you have to borrow somewhere along the way?

You can. Drake did it with the first well in the US, and it is easier that way. But the companies that made it through the mid 80's crash right on through to the new century were the ones who knew this game inside and out. I worked for one of those.

Prudent cash management comes in handy when running a lean, mean oil operating machine. The place I worked knew how to run this kind of machine and could do 7 to low 8 figure deals from cash, promoting and completing tax credit programs for operating and working interests with others, the partners in the company would occasionally cough up some cash if the case could be made for the investment. A nice fat lawsuit settlement on occasion from bigger companies going bankrupt didn't always hurt either.

Are profits just being plowed right back into new drilling? Why aren't there a ton more of new wells?

See original example. I save for a month or two, and can drill one. You did mention how small guys (usually the privates) do this, not the boomers who go bankrupt as often as I change socks, the instant the worm turns. A bunch of privates drilling here and there didn't make the US the world's greatest oil and gas turnaround example in the history of the species, folks borrowing a BUNCH of money to get their production to the next level did. And at current prices, all of them will be fine. But just as on the way up in a low price environment, the cure for high oil prices will ultimately off more than a few of them.

[Doly]

Making a bigger profit is part of the goal, of course.

Not "of course". Many businesses are quite happy generating stable profits year after year. It's true that to operate like this, the business has to be small enough not to have to go public. As soon as a company goes public, shareholders almost always demand that growth is the goal of the company.

[AdamB]

As soon as a company goes public, shareholders almost always demand that growth is the goal of the company.

Almost always...in the oil patch...before...sometimes...maybe.

Nowadays, stock buybacks are just one of the "all the rage" other shenanigans going on. Upping ones dividend doesn't hurt either!

[C8]

Company Net Revenue = $100
Company Net Expenses= $70
Drilling a new Well = $50.

So you save for 2 months, have $60 on hand, and spend $50 on drilling the well. ONE new well in this case, as little guys are just that...little.

and

So, it occurs to me that with this patient incremental growth, little guys can't really ramp up total US oil output very fast. It would be much quicker for someone to borrow a ton of cash and drill lots of wells. In that case, Tanada's post about rising interest rates depressing investment may be true.

[EnergyUnlimited]

High prices would produce more investment and more oil production- but climate change activists would not want that to happen. I am, of course, assuming Democratic Party control of the govt. The traditional views about how Peak Oil will play out could be altered substantially by govt. control.

Inflation is destroying major currencies.
How would you proceed with meaningful investment when you have monopoly money at hand?

[AdamB]

Company Net Revenue = $100
Company Net Expenses= $70
Drilling a new Well = $50.

So you save for 2 months, have $60 on hand, and spend $50 on drilling the well. ONE new well in this case, as little guys are just that...little.

and

So, it occurs to me that with this patient incremental growth, little guys can't really ramp up total US oil output very fast.

As part of this development back in the 80's and 90's, we couldn't even offset overall American decline, let alone grow it.

It would be much quicker for someone to borrow a ton of cash and drill lots of wells. In that case, Tanada's post about rising interest rates depressing investment may be true.

Tanada's statement is exactly true. And the bigger companies still aren't blowing and going because of all the reasons I've previously listed. I haven't heard a single one mention interest rates as the reason why they are taking their time and being measured about the development. Not once. And this industry understands borrowing costs as well as the bankers do.

[Doly]

How would you proceed with meaningful investment when you have monopoly money at hand?

Same way every place with high inflation has done: invest in any sort of physical stuff that isn't going to decline in value.

[Tanada]

How would you proceed with meaningful investment when you have monopoly money at hand?

Same way every place with high inflation has done: invest in any sort of physical stuff that isn't going to decline in value.

Or go to the airport and exchange your rapidly inflating currency for Euro's or Pounds or Canadian Dollars that are inflating at much lower rates. I remember reading about a group in Argentina that did this during the hyper inflation following the Falklands war. Their foreign currency still had buying power a week after they exchanged it while the unexchanged currency was more valuable as toilet paper than currency.

[Doly]

Or go to the airport and exchange your rapidly inflating currency for Euro's or Pounds or Canadian Dollars that are inflating at much lower rates.

That doesn't work so well when most of the world is experiencing inflation.

[Tanada]

Or go to the airport and exchange your rapidly inflating currency for Euro's or Pounds or Canadian Dollars that are inflating at much lower rates.

That doesn't work so well when most of the world is experiencing inflation.

All fiat currencies inflate, it is a feature of the system. That being said if "my" money is inflating at 35% and "Canada" money is inflating at 7% then converting "my" money as quickly as I can after receiving it slows the inflation rate I am suffering under by 75% minus fees for converting the currency.

[JuanP]

I witnessed ballistic hyperinflation multiple times during my childhood and adolescence in Brazil and Argentina during the 70s and 80s. It was a horrible, horrible nightmare, particularly for families with children. Currencies lost and gained value in an instant without any warning or notice.

You would go to bed at night with absolutely no idea of how much your money would be worth when you woke up the next morning. You woke up in the morning with no idea of how much your money would be worth in the afternoon. It was terrifying for most people, particularly working class families. For people with no access to Dollars or Uruguayan Pesos (the only two alternative currencies available back then) life was a nonstop rollercoaster ride.

People would work full time for a month, collect their salaries, cash them, run to the store, and find that all they could buy with a month's salary was, maybe, a pound of rice. Most people spent all their money the day they got paid. Forget about paying rent, electricity, or filling up your car. People were riding bicycles and walking to commute by the millions in places like Buenos Aires or Sao Paulo, and driving a car was dangerous because it meant you had money, so you would get robbed. They would get up in the middle of the night to get to work on time and get home late at night.

Everybody was selling anything of value they had for pennies on the dollar to survive. Family heirlooms, gold or silver jewelry, homes; cars were worthless. Pawn shop owners made a killing but got robbed and killed all the time and would have heavily armed bodyguard teams who would work for food. Anyone that could worked for food.

The only people getting by were people who had savings in Dollars or got paid in Dollars, which they would exchange as needed. Bartering was commonplace.

Most of them were cigarette smokers back then, but cigarettes were an unaffordable luxury for the vast majority. Even if you had money to buy them, the stores wouldn't sell them to you because they had no idea how much it would cost to replace them. If you could find a place that sold cigarettes, you would have to buy them one cigarette at a time, forget buying a box or a carton; that was only possible if you had Dollars. A carton of cigarettes cost around 100 dollars! Imagine a country in which the vast majority of the population is constantly undergoing Nicotine withdrawal!!! You couldn't smoke anywhere because you would get mobbed or assaulted. I was a smoker in 87-88 when I visited Buenos Aires during one of its worst economic crises. I could afford to buy cigarettes because I had Dollars.

I was staying at the most expensive hotel in the country, and I would tip the workers there using cigarettes and food, which were worth more than money because they could be bartered for anything. I had waiters and bellboys break down and cry when I gave them a few cigarettes, a bag of rice, or a can of tuna. When I left, I tipped them all in dollars.

I once took my girlfriend to dinner at Maxim's, which was the most expensive restaurant in the country, to celebrate our anniversary. We had fillet mignon with truffles and Dom Perignon champagne. The bill was in dollars, of course. I took a bag of food, dollars, and a carton of cigarettes to tip all the workers in the restaurant from the dishwasher to the Maitre d'. It caused such a scene. There were only a couple of tables busy, and I noticed that the clients were paying the bill in dollars but tipping the staff in pesos or not tipping at all; I couldn't believe it.

A crisis like that brings out the best in some people and the worst in others. The worst part for most people was the uncertainty; working but not knowing if you would be able to feed your family or not. It ate everyone inside like a cancer. Everybody was angry, depressed, or burnt out. The government passed laws to freeze rents, stop evictions, keep the electricity on, and distribute food directly to the population, so most people had a place to live and enough food to survive, but most were hungry and cold most of the time. All the streets were full of beggars, even in the most upscale neighborhoods. I wouldn't wish that on my worst enemies, if I had any.

It was completely heartbreaking and extremely stressful. Many people never recover from experiences like that; they change you forever.

[AdamB]

It was completely heartbreaking and extremely stressful. Many people never recover from experiences like that; they change you forever.

Outstanding story from a personal experience perspective. Thank you for that.