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Posts Tagged ‘Parshall

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 Mountrail’s Sweet Spots Past Their Prime?

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.

Figure 01: The chart above shows development in Light Tight Oil (LTO) extraction from January 2009 and as of October 2014 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.

Figure 01: The chart above shows development in Light Tight Oil (LTO) extraction from January 2009 and as of October 2014 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.

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Written by Rune Likvern

Friday, 9 January, 2015 at 20:40

THE REVIVAL OF MOUNTRAIL’s ”OLD” SWEET SPOTS

This post is an update and slight expansion of my previous post In Bakken (ND) it is now mostly about McKenzie County about developments in light tight oil (LTO) extraction in the Bakken/Three Forks formations in North Dakota.

It also includes a little about developments in LTO extraction from Bakken/Three Forks in Elm Coulee, Montana.

Harsh winter weather affected additions of producing wells and also caused a total estimated 300 additional producing wells (relative to entering winter) to be shut in with different durations. The total effects from well additions that was below what was estimated to sustain a level production, and the high number of wells shut in caused total LTO extraction to move sideways last winter, with a small dip during December and January.

Figure 01: The chart above shows development for annual tight oil extraction from the Bakken/Three Forks formations in North Dakota [green area and rh scale]. The black line shows development in the interest for the US 10 - Year Treasury [lh scale].

Figure 01: The chart above shows development for annual tight oil extraction from the Bakken/Three Forks formations in North Dakota [green area and rh scale]. The black line shows development in the interest for the US 10 – Year Treasury [lh scale].

Interest rates had for some time been on a downward trajectory and the extraction of tight oil from Bakken/Three Forks started to grow while interest rates continued to be lowered and the Fed and other central banks started their rapid expansion of their balance sheets. Assisted with a tighter global supply/demand balance the oil price moved higher.

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