Archive for the ‘oil companies and debt’ Category
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 CategoriesThe 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).
At first glance it is hard to see how oil, interest rates and debt are connected. Two of them are human constructs while oil (fossil sunlight), a gift from Mother Nature, took tens of millions of years to process. Oil is an endowment extracted from a confined underground stock and is now the most dense and versatile energy source known to man.Both lines are SIGNALS, and most likely plan their future based on only one of them.
The 10 Year Treasury (or similar) rate is the reference used for amongst other things to set interest rate for mortgages. Most now, aware of it or not, base their future plans on the expectations to developments of the 10 Year Treasury.
What is now playing out in the oil market may be described as below;
Low interest rates [stimulates debt growth] => Pulls demand forward => Oversupply => Deflation
How will the interest rate develop in the future?
This is important as the present huge global debt overhang weighs heavily in the consumers’ balance sheets and their affordability for costlier oil. It is also important for oil companies’ long term planning to bring costlier oil to the market.
A lasting, low rate makes higher debt loads manageable. Interest rates works both sides of the demand/supply equation.
A higher interest rate will have serious implications for highly leveraged consumers and oil companies.
The dynamics may be described as below:
Higher interest rate => lowers demand => downward pressure on price [deflation] => makes it harder for [highly leveraged] consumers/oil companies to service their debt overhang => lowers investments to develop costlier supplies
At some point in time the present oil supply overhang will come to an end. This will become reflected in a higher price.
The timing of these events creates uncertainties and the agile and financial strong oil companies will sweat out a lasting low oil price.
Few are aware of that the costs of accessing our real capital (like oil) that runs our economies are rapidly increasing.
What is different this time is that the oil price may remain lower for longer than the estimated full cycle break even costs for new developments.
The suggested path for costs is believed in the near term to come down as oil service companies have reduced their prices to shoulder the burden from the recent price collapse. Over time, the capacities of the service companies will become aligned with the demand for their services and products. At some point, as the oil price recovers and investments pick up, the market mechanisms will bring the prices from the service companies up as the service companies also need to make a profit to stay in business.
In figures 4 and 5 are shown how the combination of lower interest rates and a lasting, high oil price encouraged the oil companies to rapidly take on more debt to develop costlier oil on the expectations that consumers had remaining ability to take on more debt/credit to pay for this, thus allowing the oil companies to retire their debts.
The oil companies’ behavior in the recent decade is reminiscent of group think. Few expected the oil price to collapse, though the oil industry itself repeatedly point out the cyclical nature of the oil price.
The aggregate of developments (primarily driven by an amazing growth in the extraction of light tight oil [LTO]) gradually resulted in a supply overhang that made the oil price collapse.
The costs of extracting real capital, like oil, has been rapidly increasing, yet we are making decisions for the future as if it were decreasing, based on the price of capital (money). This is a short term phenomenon that will last until supply and demand become balanced.
The present situation with an apparent oil glut and low prices is a temporary false signal.
This may also be the case with the low interest rates.
The near future will reveal how the competition for available funds to service a still growing huge global debt overhang fare towards the need to fund developments of costlier oil.
Can an increasingly leveraged global economy handle both higher oil prices and interest rates and still remain on its growth trajectory?
In this post I present actual Norwegian crude oil extraction and status on the development in discoveries and reserves and what this has now resulted in for expectations for future Norwegian crude oil extraction.
This post is also an update of an earlier post about Norwegian crude oil reserves and production per 2014.
Norwegian crude oil extraction peaked in 2001 at 3.12 Million barrels per day (Mb/d) and in 2015 it was 1.57 Mb/d, growing from 1.51 Mb/d in 2014.
The Norwegian Petroleum Directorate’s (NPD) recent forecast expects crude oil extraction from the Norwegian Continental Shelf (NCS) will decline to 1.53 Mb/d in 2016.Sanctioned Developments in Figure 01 represents the total contributions from 7 sanctioned developments of discoveries now scheduled to start to flow between 2016 and 2019.
My forecast for 2016 is 1.50 Mb/d with crude oil from the NCS.
My forecast shown in figure 01 includes all sanctioned developments and not discoveries (refer also figure 08) and contingent resources in the fields. The forecast is subject to revisions as the reserve base becomes revised (as discoveries pass the commercial hurdles) which likely will fatten the tail of the presented forecast post 2020.
My forecast assumes some reserve growth, but does not include the effects from fields/discoveries being plugged and abandoned as these reach the end of their economic life.
Discoveries sanctioned for development and Johan Sverdrup (with an expected start up late 2019) is expected to slow down the decline in Norwegian crude oil extraction.
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.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.
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.
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.
This post is an update on LTO extraction in Bakken based upon published data from the North Dakota Industrial Commission (NDIC) as per January 2015.
This post also presents a closer look at developments in LTO extracted from the three of the four counties that presently dominates LTO extraction; McKenzie, Mountrail and Williams.
With an oil price below $50/Bbl (WTI) the companies involved in extraction of LTO in Bakken faces two financial challenges;
- The decline in the cash flow from operations reduces funding capacities for manufacturing new wells. A lower oil price also lowers the value of the companies’ assets and borrowing capacities.
- The “average” well with around 90 kb [90,000 Bbls] 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 $65/Bbl (WTI). The break even price increases with increases in the return requirement.
From December 2014 to January 2015 LTO extraction from Bakken(ND) declined from 1.16 Mb/d to 1.13 Mb/d.
In short, LTO extraction at present prices ($45/Bbl, WTI) makes little commercial sense!
What follows are the continuance of my research, discussions, observations and thoughts around the nexus of debts, interest rates and the oil price.
I now believe these relations are poorly understood and with total global debt levels at all time highs (and growing), years of low interest rates, which are kept low (by concerted efforts by central banks) while the oil price in recent months has collapsed may hide a SIGNAL that struggles with attention from too much noise.
- A collapsing oil price while interest rates remain low is likely the proverbial canary.
Global Crude Oil Supplies, The Oil Price And Interest RatesCause and effects amongst the oil price and interest rates are of course subject to (some informed and gripping) discussions.
- The price of oil appears to have been the leading indicator.
- Any (small) increase to the interest rate now will likely affect demand for oil and thus its price, thus further slowing investments for new supplies.