Posts Tagged ‘LTO’
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 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.
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.
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.
- 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).
- The break even price increases with increases in the return requirement.
- 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.
With an oil price below $50/Bbl (WTI) the companies involved in extraction of LTO in Bakken will face several financial challenges.
In several posts I have presented my exploration of any relations between total global debt, interest rates and the oil price.
Sometimes I am left with the impression that when societies’ are looking for a scapegoat for its ills, their reactions bring forth memories from a scene of the movie “Casablanca”, where Captain Renault confronted with solving a crime commands his men; “Round up the usual suspects!”.
For many years one of these “usual suspects” has been and will continue to be: The Oil Price.
However, looking at time series of developments in total global debt and interest rates makes me wonder if not more light should have been directed towards developments in total global debt and interest rates to obtain profound understandings of the fundamental forces that drives the oil price through its ebbs and flows.
In the post “It is the Debt, Stupid” from December 2011 (in Norwegian and refer figure 6) I illustrated how much a 1% increase in the interest rate for public debt in some countries equated to as an increase in the oil price (this was admittedly a simplistic and static comparison, and the exercise was intended to draw attention to the level of debts which made many economies more sensitive to interest hikes than to oil price increases).
Starting in 2014 there has been a steady flow of reports, worth studying, that focused on the growth in total global debt levels, like the 84th BIS Annual Report 2013/2014 and VOX CEPR (CEPR; The Centre for Economic Policy Research) with its “Deleveraging, What Deleveraging?”, The 16th Geneva Report on the World Economy.
In February 2015 McKinsey published “Debt and (not much) deleveraging” which also presents some deep insights into developments of debt by sector for some countries.
The chart above contains plenty of information about total global debt levels, debt and developments to the growth rate of debt by sector and not least, how total global debt has grown faster than Gross Domestic Product (GDP).
The short version is that post the Global Financial Crisis (GFC) of 2008, which was triggered by too much debt, the global economy was brought back on its trajectory by the use of more debt stimulated by low interest rates.
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!
This post is an update on total Light Tight Oil (LTO) extraction from Bakken in North Dakota based upon actual data as of October 2014 from North Dakota Industrial Commission (NDIC). It further presents a statistical analysis on developments of well productivity with a detailed look at developments in Parshall, Reunion Bay and Sanish.
- There were general improvements in LTO well productivity in Bakken during 2013.
- Present trends in LTO well productivity for Mountrail’s sweet spots (Alger, Parshall, Reunion Bay, Sanish and Van Hook) suggests these are past their prime.
- Figure 29 in this post show development in well productivity for Alger and Van Hook and figures 06, 08 and 10 for Parshall, Reunion Bay and Sanish. A common feature for Parshall, Reunion Bay, Sanish, and Van Hook is that these reached new highs in well productivity for wells started in 2013.
Alger has been in general decline since 2011.
- LTO extraction in recent years may be viewed as a source for global swing production for oil.