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A little on the Profitability of the Bakken(ND)

In the first part of this post I present an update on the profitability for Light Tight Oil (LTO) extraction in the Bakken (ND) as one big project.

This is followed with economic life cycle analysis for the average LTO well of the 2014, 2015 and 2016 vintages in the Bakken.

This analysis found that companies in aggregate continue to outspend net cash flows from operations and for 2017 this is now expected to total $2 – $3 Billion.

  • The strong growth and sustained high LTO extraction from the Bakken were facilitated by considerable amounts of debts. The growth in total debts outstanding (employed capital) continues to grow, albeit at a slower pace.
  • With oil prices sustained at present levels the total employed capital (primarily debt) constitutes severe obstacles for the profitability for the Bakken.
  • In a scenario where no wells were added post 2017 and the wellhead (at WH) price remained at $40/bo [~ $50/bo WTI] estimated losses for the project would be $20 – $22 Billion.
  • In a scenario where no wells were added post 2017 and the wellhead price remained at $60/bo [~ $70/bo WTI], the payout was reached after 7,5 years (in 2025) and the estimated return for the project becomes 3,5%.
  • With a sustained wellhead price at $74/bo [~ $84/bo WTI] post 2017, the payout was reached after 4,3 years (in 2022) and the estimated return becomes 7%.
    What makes the profitability for the Bakken challenging are the number of years front loaded with negative cash flows.
  • So far the recent years improvements in flow and Estimated Ultimate Recovery (EUR) have not entirely caught up with the decline in and the sustained lower oil price.
  • For the average 2016 vintage well it was estimated that a sustained oil price of $53/bo at WH [~ $63/bo WTI] would return 7%.

    Figure 01: The chart above shows the estimated rolling 12 months totals [black columns] net cash flows. The red area shows the estimated cumulative net cash flow since Jan-09 and per Jul-17. LOE, G&A and interest rates (effective, i.e. adjusted for tax effects) based on a weighted average from several companies’ SEC 10-K/Q filings. Taxes according to what has been in force. Price of oil, North Dakota Sweet (NDS) and realized gas price as reported by several companies.

In the Bakken(ND) and since January 2009 and per July 2017 an estimated $100 Billion has been used for manufacturing operational LTO wells and at end July 2017 an estimated $35 Billion were outstanding to be recovered from the estimated remaining proven developed producing (PDP) reserves.

At the most CAPEX for well manufacturing in the Bakken out spent cash flow from operations at an annual rate of $9 Billion. For the Bakken there has been two distinct CAPEX cycles, the first in 2011/2012 while the oil price remained high, followed by another in 2015 after the collapse in the oil price.

The second cycle may have been rationalized by several factors like an expected rebound in the oil price, which OPEC (primarily its Middle East members) helped derail through their rapid increase in oil supplies starting in early 2015 in an (believed) effort to fight for market share. The second cycle may also have been rationalized by the incentive structure for management of LTO companies in which these were rewarded by volume growth over profitability.

Incurred costs for drilled, uncompleted wells (DUCs) and salt water disposal wells (SWDs) are not included. Directors cut for September 2017 listed 889 wells waiting for completion. Costs from any heavy and costly well maintenance/interventions are not included.

The DUCs represents $2,2 – $2,7 Billion in capital employed.

For the Bakken as one big project and the life cycle analysis the gross interest costs of 6% were reduced by 35% to reflect corporate tax effects.

Effects from hedges and from bankruptcy proceedings (debt restructuring) are not included.

Any arbitrage from the realized oil price adjusted for wellhead price, transport costs and any tax effects from this arbitrage are not included.

Some companies are now recirculating primarily borrowed money (at some interest) from the net operating cash flow and injecting additional capital  to continue the manufacturing of new wells.

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Written by Rune Likvern

Sunday, 8 October, 2017 at 19:26

The Bakken, a little about EUR and R/P

In this post I present some of the methods I have used to get estimates based on actual NDIC data on the Estimated Ultimate Recovery (EUR) for wells in the Bakken North Dakota.

The Bakken is here being treated as one big entity. As the Bakken shales [for geological reasons] are not ubiquitous there will be differences amongst pools, formations and companies.

One metric to evaluate the efficiency of a Light Tight Oil (LTO) well and a large population of wells are looking at developments in the Reserves over Production (R/P) ratio.

The R/P ratio is a snapshot that gives a theoretical duration, normally expressed in years, the production level for one particular year can be sustained at with the reserves in production at the end of that year.

Further, as LTO wells decline steeply and a big portion of the total extraction has come/comes from wells started less than 2 years ago, this dominates the Reserves/Production (R/P) ratio. The flow from a big population of high flowing wells in steep decline results in a low R/P ratio (and vice versa).

The R/P metric says nothing about extraction in absolute terms, which is another metric that needs to be brought into consideration in order to obtain a more complete picture of expected developments.

Development in Well Totals by Categories

Figure 1: In the chart above the about 10,000 wells with 12 months of flow or more [started as of Jan-08 - Jul-15] has been split into 5 categories [ref the legend] and the average monthly flow versus total [for the average] has been plotted for each category. Cut off has been made after 72 months (6 years) as the declining number of wells over time makes the calculations susceptible to noise like from refracking in the tail and because of a declining well population. This method makes it possible to identify the EUR trajectories for each category of wells. The average well in the Bakken now follows a trajectory 2-4% below the green line [wells above 75 kbo and less than 100 kbo after the first 12 months of flow]. The colored dotted lines [sloping upwards to the right] connects each category after the first 12, 24, 36, etc months of flow.

Figure 1: In the chart above the about 10,000 wells with 12 months of flow or more [started as of Jan-08 – Jul-15] has been split into 5 categories [ref the legend] and the average monthly flow versus total [for the average] has been plotted for each category. Cut off has been made after 72 months (6 years) as the declining number of wells over time makes the calculations susceptible to noise like from refracking in the tail and because of a declining well population.
This method makes it possible to identify the EUR trajectories for each category of wells. The average well in the Bakken now follows a trajectory 2-4% below the green line [wells above 75 kbo and less than 100 kbo after the first 12 months of flow].
The colored dotted lines [sloping upwards to the right] connects each category after the first 12, 24, 36, etc months of flow.

The average Bakken well is now estimated to reach a EUR of 320 kbo [kbo; kilo barrels oil = 1,000 bo]. Based on this, the average well has an R/P of 2.7 after its first year of flow, which suggests that about 27% of its EUR is recovered during its first year of flow.

Estimates done by others based on actual NDIC data puts now the EUR for the average Bakken well slightly below 300 kbo.

As from what point the wells reach the end of their economic life, educated guesses now spans from 10 bo/d (0.3 kbo/Month) to 25 bo/d (0.75 kbo/Month).

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Written by Rune Likvern

Sunday, 21 August, 2016 at 20:13

The Bakken LTO extraction in Retrospect and a Forecast of Near Future Developments

In retrospect, it becomes easier to understand the amazing growth and resilience of Light Tight Oil (LTO) extraction from Bakken (and other US tight oil plays) if the effects from the use of huge amounts of debts (including assets and equities sales) is put into this context.

Debt leverage together with a high oil price are what stimulated the US LTO extraction for some time to appear as something like a license to print money.

Now, and as long present low oil prices persist, the LTO companies are in financial straitjackets.

  • It was high CAPEX in 2015 from external funding, primarily debt and assets/equities sales, that created the impression of LTO’s resilience to lower oil prices (ref also figure 2).
    Actual data show that so far there has been some improvements in well productivities [cumulative versus time]. However, these improvements by themselves do not fully explain the apparent resilience of LTO extraction to lower oil prices.
  • NONE of the wells now added in the Bakken are on trajectories to become profitable at present prices (ref also figure 3).
    The average well now needs about $80/bo at the wellhead to be on a profitable trajectory.
    (The average spread between WTI and North Dakota Sweet has been and is above $10/bo.)
  • As far as actual data from NDIC on well productivity (EUR trajectories) provide any guidance it is not expected that well manufacturing will pick up in a meaningful way before the oil price moves and remains above $60/bo @ WH.

Writing down the drilling cost and rebasing profitability from completion costs [for DUCs, Drilled UnCompleted wells] does not change this fact.

  • The decline in the LTO extraction will (all things equal) relentlessly erode future funding capacities for drilling and completion [well manufacturing].
  • It is now all about the net cash flow from operations, debt service and retirement of debts [clearing the bond hurdles]. Debt management and debt restructuring will remain on top of the agenda for management of LTO companies. It should be expected that the management of these companies will do everything in their powers to clear the bond hurdles and keep their companies out of bankruptcy.
  • For 2016 well additions in the Bakken will fall below the threshold that allows to fully replace extracted reserves.
    In the industry this is referred to as the Reserves Replacement Ratio (RRR).
    For the Bakken the RRR for 2016 is now expected to be below 50%.
    (This lowers the collateral of the LTO companies and their debt carrying capacities.)

At present prices several companies cannot both retire their debts according to present redemption profiles and manufacture a lot of wells. This is why it is suspected that halting all drilling (where feasible [i.e. Contracts without stiff penalties for cancellation]) and deferring completions have become a necessity born out of the requirements for debt management.

This analysis presents:

  • A forecast on total LTO extraction for Bakken (ND, MB/TF) towards the end of 2017.
  • A closer look at a generic LTO company in Bakken and its near future challenges with clearing the bond hurdles.
    (The generic LTO company is based on [weighted] financial data from several, primarily Bakken invested companies’ Security and Exchange Commissions (SEC) 10-K/Q filings for 2015).
    To keep the focus on the (debt) dynamics in play, The Financial Red Queen, I opted to use a generic company. This is also done to play down discussions about specific companies.
  • The important message to drive home is how declining cash flow from operations, the big debt overhang and clearing the bond hurdles will constrain many LTO companies’ funding (CAPEX) for well manufacturing [drilling and/or completion] as long as oil prices remain below $60/bo @WH (or about $70/bo, WTI).

Figure 1: The chart above show actual LTO extraction from Bakken (ND, MB/TF) [green area], the funding constrained forecast towards end 2017 [grey area] and how LTO extraction is forecast to develop if no producing wells were added post Jan-16 [black dotted line].

Figure 1: The chart above show actual LTO extraction from Bakken (ND, MB/TF) [green area], the funding constrained forecast towards end 2017 [grey area] and how LTO extraction is forecast to develop if no producing wells were added post Jan-16 [black dotted line].

The companies operating in Bakken come in many sizes and business models and some of the majors (or subsidiaries thereof) likely have bigger financial muscles, lower debt costs (interest rates) and may have somewhat lower specific costs due to scale of operations.

  • With sustained low oil prices, the servicing of total debt has been and will be the power that forces companies deep in debt and heavily exposed to LTO into bankruptcies and causes losses on creditors and become the real driver behind the steep decline in LTO extraction.

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Written by Rune Likvern

Wednesday, 6 April, 2016 at 21:51

Bakken(ND) Light Tight Oil – Update with Sep – 15 NDIC Data

After years of following developments in extraction of light tight oil (LTO) in the Bakken, the oil price, studying actual well production data from the North Dakota Industrial Commission (NDIC) and the SEC 10-Q/Ks filings for several companies heavily exposed to the Bakken, a quote from Shakespeare’s Macbeth comes to the fore of my mind:

All causes shall give way: I am in blood

Stepp’d in so far that, should I wade no more,

Returning were as tedious as go o’er:

                                              (Macbeth: Act III, Scene IV)

For me the Macbeth quote very much sums up the predicament many Bakken LTO operators now find themselves in.

Figure 01: The above chart shows developments by vintage in LTO extraction from the Middle Bakken/ Three Forks/Sanish formations in Bakken (ND) as of January 2008 and of September 2015 [right hand scale]. The color grading shows extraction by month. Development in the oil price (WTI) black line is shown versus the left hand scale.

Figure 01: The above chart shows developments by vintage in LTO extraction from the Middle Bakken/ Three Forks/Sanish formations in Bakken (ND) as of January 2008 and of September 2015 [right hand scale].
The color grading shows extraction by month.
Development in the oil price (WTI) black line is shown versus the left hand scale.

What this study/update present:

  • With the decline in the oil price the average well as from the 2012 vintage will struggle to reach payout and become profitable.
    (The oil price decline reduces the portion of the more recent wells that are on trajectories to reach payout and become profitable.)
  • The 2015 vintage follows the 2014 vintage closely, suggesting that around 20% of the wells of 2015 vintage are on a trajectory to reach payout and become profitable.
  • The underlying decline from the legacy wells is strong. The extraction from all the wells started between Jan 2008 and Dec 2014 declined by close to 440 kb (or about 41%) from Dec 2014 to Sep 2015.
  • Some of the early wells (2008 vintage) have been restimulated (refracked) and the effects are short lived and the economics of this looks questionable, at best.
  • A near steep decline in LTO extraction from the Bakken is baked into the cake due to the financial dynamics created by a lasting low oil price.
  • An average of around 136 wells/month were added so far in 2015 while extraction declined close to 60 kb/d, suggesting 140 – 150 wells needs to be added each month to sustain present extraction levels.

Studying the SEC 10-K/Qs for several of the companies that are heavily weighted in the Bakken shows that natural gas and NGLs (Natural Gas Liquids) are weighing down the financial results for many companies.

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Written by Rune Likvern

Monday, 30 November, 2015 at 21:49

Are the Light Tight Oil (LTO) Companies trying to outsmart Mother Nature with their Financial Balance Sheets?

In this post I present what I found from applying R/P (Reserves divided by [annual] Production) ratios for Light Tight Oil (LTO) for 3 big companies in Bakken/Three Forks/Sanish.

The companies are; Continental Resources, Oasis Petroleum and Whiting Petroleum, which operated 28% of total LTO extraction in the Bakken(ND) in December 2014.

  • Undertaking oil and gas reserves assessments are just as much an art as a science.

From previous work with LTO from Bakken I kept track of the R/P ratio for wells/portfolios and generally found it was in the range of 3 – 4 after their first year of flow. This suggested that 25 – 35% of the wells’ Estimated Ultimate Recovery (EUR) was extracted in their first year of flow.

This made sense as extraction (production) from LTO wells are heavily front end loaded and have steep initial declines.

Examining some big Bakken companies SEC 10-K (SEC; Securities and Exchange Commission) filings for 2014 I noticed that these had R/P ratios for Proven Developed Reserves (PDP) that ranged from 7 – 9.

(Refer to the end of this post for more detailed explanations/definitions of PDP and PUD)

That did not make sense and R/P ratios give away powerful and very valuable information about likely future extraction trajectories.

About 50% of the companies’ total LTO extraction (flow) in Dec 2014 in Bakken (ND) were from wells started in 2014. In other words, the flow was dominated by “young” wells which decline rapidly. Therefore, whatever flow data (monthly, quarterly) that was annualized it should be expected a R/P ratio for total extraction around 4 for 2014.

What I present is how PDP, extraction data and R/P data derived from the 3 companies SEC 10-K statements compares to what was derived from actual data. Further, what actual data now is projecting for EUR for the average well for these companies.

Figure 1: The chart above shows developments in average well first year LTO totals (productivity) for some companies and by vintage. The colored columns for 2013 and 2015 show projected financial performance based on average well first year LTO totals. For 2013 the chart is based on: WTI at $98/b and a type well at $10M was found to have a 0% return with a total first year LTO flow at about  50 kb.  For 2015 the chart is based on: WTI at $60/b and a type well at $8M was found to have a 0% return with a total first year LTO flow at about 90 kb.  The chart illustrates that the well productivity has been on an upward trend. So far the productivity improvements and cost reductions have not fully compensated for the effects from a much lower oil price.  The profitability equation of the type well was solved for the equivalent total first year flow for various oil prices and costs on a point forward basis. A lower oil price makes the red columns “push” the other ones upwards (moves the profitability bands upwards). Wells of 2015 vintage (pre May) are on a trajectory close to those of the 2014 vintage. kb,  kilo barrels = 1,000 barrels

Figure 1: The chart above shows developments in average well first year LTO totals (productivity) for some companies and by vintage. The colored columns for 2013 and 2015 show projected financial performance based on average well first year LTO totals.
For 2013 the chart is based on: WTI at $98/b and a type well at $10M was found to have a 0% return with a total first year LTO flow at about 50 kb.
For 2015 the chart is based on: WTI at $60/b and a type well at $8M was found to have a 0% return with a total first year LTO flow at about 90 kb.
The chart illustrates that the well productivity has been on an upward trend. So far the productivity improvements and cost reductions have not fully compensated for the effects from a much lower oil price.
The profitability equation of the type well was solved for the equivalent total first year flow for various oil prices and costs on a point forward basis.
A lower oil price makes the red columns “push” the other ones upwards (moves the profitability bands upwards).
Wells of 2015 vintage (per May) are on a trajectory close to those of the 2014 vintage.
kb, kilo barrels = 1,000 barrels

LTO in Bakken will now generally work profitably with an oil price (WTI) above $80/b.

The willingness of several companies to sell more debt (obtain more credit), assets and equity to continue to manufacture LTO wells which estimates showed were not commercially viable have had many analysts puzzled.

Something was likely overlooked, and chances are that this is related to EUR driven incentives to expand assets/equity on the companies’ balance sheets (or “book to model”).

As companies drill wells and puts these in operation (production), it allows them to book reserves on the balance sheets. And reserves are the biggest portion of the LTO companies’ balance sheets.

The rush to use credit/debt to drill what likely would become unprofitable wells (applying project economics) with a lasting, low oil price appears driven by some perverse incentive to grow booked reserves to grow assets and thus equity on the companies’ balance sheets, overriding outlooks for poor profitability. High equity on the balance sheets allows for more debt.

Looking at actual, hard well data (from NDIC; North Dakota Industrial Commission) this strategy will at some point have to face up to the realities of physics and Nature. And physics and Nature do NOT negotiate.

  • Using actual data for LTO wells strongly suggests that the PDP (and thus PUD) estimates in companies’ SEC 10-K filings for 2014 are grossly inflated. If so, this has inflated the assets/equity numbers on the companies’ balance sheets.
  • The findings from this study suggest that the massive drilling activity funded by growing debt, was likely motivated by balance sheets expansions of assets, and thus the equity from inflated EUR numbers (“book to model”) which made room to take on more debt.
  • An inflated balance sheet that allows for a debt load above the carrying capacities of the real underlying collateral, will at some point in time turn against their creators and call for revisions of future plans and expectations.
  • It will be interesting to see how the LTO companies’ balance sheets and their profitability respond as it become Mother Nature’s turn with the bat.

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Written by Rune Likvern

Monday, 3 August, 2015 at 10:33

Status on the Bakken ”Red Queen” with Data as per April 2015

This post presents a study of developments of Light Tight Oil (LTO, shale oil) extraction for 8 companies in Bakken(ND) that as of April 2015 had added around 600 (or more) producing wells in the Bakken/Three Forks formations since January 2008.

The 8 companies are; Continental Resources, EOG Resources, Hess Bakken Investments, Marathon Oil Company, Oasis Petroleum, Statoil Oil & Gas, Whiting Oil and Gas Corporation and XTO Energy.

These 8 companies had around 63% of total LTO extraction from Bakken as of April 2015.

The decline in the oil price has so far reduced the number of rigs drilling in Bakken and a decline in total LTO extraction in Bakken. This study shows there are differences in responses amongst the studied companies to the oil price decline.

As with most other things, size matters, also in Bakken.

Figure 1: The chart above (stacked areas) shows developments in total  LTO extraction, split on the 8 presented companies and others. 4 of the studied companies had growth in LTO extraction for the period from December 2014 through April 2015 which are stacked on top. NOTE: The chart does not include contributions from wells starting to flow prior to 2008 for the presented companies and the contributions from these wells are included in others and normally diminishes as the wells ages.

Figure 1: The chart above (stacked areas) shows developments in total LTO extraction, split on the 8 presented companies and others.
4 of the studied companies had growth in LTO extraction for the period from December 2014 through April 2015 which are stacked on top.
NOTE: The chart does not include contributions from wells starting to flow prior to 2008 for the presented companies and the contributions from these wells are included in others and normally diminishes as the wells ages.

Data from the North Dakota Industrial Commission (NDIC) shows that in  April 2015 Bakken LTO extraction was at 1.11 Mb/d, down from a high of 1.16 Mb/d as of December 2014.

  • For the period December 2014 – April 2015 those in decline lost about 76 kb/d (close to 10%), while those with growth added around 21 kb/d, curtailing total decline at 55 kb/d (close to 5%).
  • The 4 companies with growth added about 300 producing wells (46%) of a total of 645 for the months January – April 15 and contributed about 37% of the total Bakken LTO extraction per April 2015.

kb; kilo barrels = 1,000 barrels

The decline in the oil price and LTO flow (for some companies) is likely to move focus to CAPital EXpenditures discipline, profitability and balance sheets healing.

The low oil price has already affected the scale of the drilling and will in the near future lead to a decline in the monthly producing wells additions.

At present oil prices ($60/Bbl, WTI) the net cash flow from operations could unabridged pay for the addition of around 100 wells/month (from spud to flow).

As of the recent months an average of 160 producing wells was started monthly and LTO extraction declined.

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Written by Rune Likvern

Thursday, 18 June, 2015 at 21:48

The Bakken ”Red Queen” is restrained with more credit

 

NOTE changes to: ABOUT FRACTIONAL FLOW, CONTACT, LINKING, COPYRIGHTS


 

This post is an update on Light Tight Oil (LTO) extraction in Bakken based upon published data from the North Dakota Industrial Commission (NDIC) as per March 2015.

Extraction developments of LTO from Bakken may be followed by county, formation, vintage of wells, and one important source to understand the developments are coming from studying the developments by companies. Holding this up with companies’ financial statements (10-K and 10-Q) is an invaluable source about the companies, their financial capabilities and their strategies. This information is paramount to understand the developments in LTO extraction from Bakken and provides valuable insights into what to expect of future developments.

To get some understanding of what will drive future developments, it is helpful to look at individual companies.

Amongst all the companies operating in Bakken I selected for this post to present a closer look at 3 of the biggest companies in Bakken; Continental Resources, EOG Resources and Whiting Petroleum.

These 3 companies were found to be representative for several of the companies with regard to a range of variation in quality of wells, development strategies, use of debt, asset sales and not least what their responses to oil price changes may reveal.

  1. For Q1 – 15 the companies involved in LTO extraction in Bakken used an estimated $4 Billion (CAPEX) for well manufacturing and an estimated $2.3 Billion was from external sources, primarily from equity and asset sales and assuming more debt.
    The “average” well with around 90 kb [90,000 barrels] of flow in its first year is estimated to have an undiscounted point forward break even (that is a nominal break even with 0% return for the well) at around $60/Bbl (WTI).
  2. The break even price increases with increases in the return requirement.
  3. This analysis shows that the companies have deployed different strategies as responses to the decline in the oil price, which will affect future developments in LTO extraction.

Figure 1: The chart above shows development in Light Tight Oil (LTO) extraction from January 2009 and as of March 2015 in Bakken North Dakota [green area, right hand scale]. The top black line is the price of Western Texas Intermediate (WTI), red middle line the Bakken LTO price (sweet) as published by the Director for NDIC and bottom orange line the spread between WTI and Bakken LTO wellhead all left hand scale. Note that the spread between WTI and Bakken LTO wellhead has remained relatively high and fairly stable during the recent year.

Figure 1: The chart above shows development in Light Tight Oil (LTO) extraction from January 2009 and as of March 2015 in Bakken North Dakota [green area, right hand scale]. The top black line is the price of Western Texas Intermediate (WTI), red middle line the Bakken LTO price (sweet) as published by the Director for NDIC and bottom orange line the spread between WTI and Bakken LTO wellhead all left hand scale. Note that the spread between WTI and Bakken LTO wellhead has remained relatively high and fairly stable during the recent year.

Since September 2014 and as of March 2015 LTO extraction from Bakken(ND) has flatlined at  1.12 – 1.16 Mb/d.

With an oil price below $50/Bbl (WTI) the companies involved in extraction of LTO in Bakken will face several financial challenges.

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Written by Rune Likvern

Sunday, 7 June, 2015 at 20:33

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