Splitting hairs I think. What my point is that should Shale resources be treated like conventional. I am not alone in this concern, as a simple search for Shale Gas / Tight Oil earnings will raise many a concern about shale oil and gas earnings, or lack off. Is it right to use methodology for long term assets, such as an offshore platform, with shale wells. A shale well, oil or gas prone, has in the main a lifetime measured in months- it is a rapidly depreciating asset in most cases, and if the well is not paid down in about 36 months it probably will not be profitable, especially for gas wells.
Well first off most of the shale wells with high liquids content pay off in the period of hyperbolic decline which is the first 36 months, especially so at $60/bbl WTI. The investment into a single well is in the order of $7 MM even when you include tie-in costs amortized amongst a group of wells. In comparison an offshore well will cost well north of $50 MM for what is being drilled in the Gulf at this point in fact north of $100 MM is more the case. A fully loaded offshore spar to produce that deeper water production adds billions to the cost. Pay out even for high production wells is generally much more than 5 years. Secondly shale wells have a life much longer than months. The theory is proving to be correct a 3 – 4 year period of hyperbolic decline followed by a long period of exponential decline. During exponential decline rates are low but the well has already paid out and OPEX on-going is minimal, these wells are cash machines for a long period of time. It isn’t uncommon for the shale producers to have thousands of wells, but simply assume one has 500 producers that are all now in the exponential decline phase of around 24 bopd. That ends up being around $225 MM in free cashflow if you assume a netback of $50/bbl (entirely within reason when OPEX/well is very low). One simply has to look at break even prices on wells. Rystad Energy pointed out that there are areas as low as $30/bbl for liquid rich areas. There are of course areas that are still marginal at current price but that isn’t the whole industry by a long stretch. These companies are run by idiots as some on this site seem to think. If they weren’t making money or at least had a very clear path to adding value they would not be in business.
A quick look at 5 year old wells in the Marcellus will show monthly production of gas frequently below 100 million cu ft . You do not have to be a genius to work out the revenue.
Lets look at the first example I found…Enerplus. At $4.17/Mcf they netbacked $2.47. They would still be churning out close to $3 MM per well per year with very little OPEX. Those wells will almost certainly have paid out given initial gas rates are high (10 – 6 MMcf/d which amounts to say on average the first year $7.2 MM) so cashflow after the first year is all to the positive. Gas is not as bad in certain areas as some would think. The trick is to get drilling costs down and IP high through lateral length, number of stages etc.
The amount of investment in shale wells has been far in excess of earnings. Shale producers will have to learn to live off cash flow in future as investors will be reluctant to keep pouring good money after bad.
Well apparently you aren’t someone who has invested in the oil industry as you seem to be treating it like a factory producing widgets. The market looks to most of the shale producing companies as stock growth engines, not dividend generators. In order to grow those companies are not only required to hold almost no cash on hand (working capital excluded) but are encouraged to invest to grow (more wells and acquisitions). Rapid growth in a competitive environment requires leverage through debt or additional equity raise in the markets. The shale players could have chosen to grow within cashflow but they would have been left with no investors, those investors wanting to see rapid growth in land, reserves and production. And as to earnings…they are calculated based on net income which includes both cash and non cash items. Most of the non cash items are immaterial to how well an investor will do with a particular oil and gas company. People who invested in shale companies in 2005 and got out in 2014 did extremely well in the market, the reason there are any complaints has to do with the drop in commodity price and the attendant drop in share prices and the fact they haven’t returned to their highs. If you invested in some of the shale players in 2015 you would have done very well in the market. Like everything else it is timing.