Download pdf - Tight Oil Money Return on Investment Eagle Ford Shale Case ...Mar 21, 2018 · • Group decline-curve analysis by operator & vintaged year of first production from 2013-2016. •

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Tight Oil Money Return on Investment Eagle Ford Shale Case History

Art Berman Labyrinth Consulting Services, Inc.

American Chemical Society New Orleans, LA March 21, 2018


TheEagleFordShalePlay

• LocatedinSouthTexasbetweenSanAntonioandCorpusChristi.• Horizontaldrillingandhydraulicfracturingbeganin2008.• Approximately17,000producingwells.• Februaryproductionwas935,000bo/d,downfrom1,324,000inDecember2014.• 71activehorizontalrigs.• Anover-saturatedsolutiongasdrivemechanismwithaminorstructuralcomponent.• Productionisvolatileoilandcondensate.• 88%oftheoilis>40APIgravityand32%is>50APIgravity.

Corpus Christi

HoustonSan Antonio

EAGLE FORDSHALE PLAY

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Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 IncrementalProductionSinceApril2015(mmb/d)

U.S.OilFutureisaBetOnaSinglePlayPermianBasinistheOnlyTightOilPlayProducingMoreOilThantheApril2015

PeakFollowingtheOIl-PriceCollapse

Source:EIA&LabyrinthConsultingServices,Inc.

EagleFord

Bakken

AnadarkoNiobrara

Permian

EagleFord

Bakken

Base

2015PreviousPeak

Production

AnadarkoNiobrara


EagleFordWellPerformanceEvaluationbyDecline-CurveAnalysis

100

1,000

10,000

100,000

1 10 100

Rate,bblsorM

scf/mon

thTimemonths

LogLogPlotRatevsTime

Points=ActualDataLine=ForecastOil=Green,Gas=Red

100

1,000

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100,000

0 5 10 15 20 25 30 35 40 45 50 55 60

Mon

thlyRate,bblso

rMscf

MonthsfromFirstProduction

Semi-LogPlotofRatevs.Time

Points=ActualDataLine=Forecast

Oil=Green,Gas=Red

EOG 2013OIL GAS

Max 57,000 53,000b 1.25 1.30

Di 20.00 12.00EUR 401,691 295,699

100

1,000

10,000

100,000

1 10 100

Rate,bblsorM

scf/mon

th

Timemonths

LogLogPlotRatevsTime

Points=ActualDataLine=ForecastOil=Green,Gas=Red

100

1,000

10,000

100,000

0 5 10 15 20 25 30 35 40 45 50 55 60

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thlyRate,bblso

rMscf

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Semi-LogPlotofRatevs.Time

Points=ActualDataLine=Forecast

Oil=Green,Gas=Red

DVN 2014OIL GAS

Max 30,000 70,000b 0.475 0.45

Di 1.80 1.20EUR 370,863 1,100,892

• Top6EagleFordoperatorswereevaluated:Chesapeake,ConocoPhillips,Devon,EOG,Marathon,&Sanchez.

• Standardratevstimedecline-curveanalysiswasusedtomatchproductionanddetermineEUR(estimatedultimaterecovery).

• Productionwasnormalizedandvintaged byyearoffirstproduction.• Groupdecline-curveanalysisbyoperator&vintaged yearoffirstproductionfrom2013-2016.• Matchesweregoodtoexcellentformostoperatorsandvintage-yeargroups.• 2017wasproblematicasexpectedbecauseofshortproductionhistory.• Standardsemi-logplotswereusedinconjunctionwithlog-logplotstocalibrateb-exponentsfor

hyperbolicdecline.• OilandgasstreamsweredeclinedseparatelyandlaterintegratedthroughBOE(barrelofoil

equivalent)conversion.


IntegratingOil,NaturalGas&NaturalGasLiquids(NGL)Production

• Thestandardconversionofnaturalgas-to-barrelsofoilequivalentis6:1basedonenergycontent.• Avaluerelationshipofoil&gasismoreusefulforeconomicanalysis:

Ø $60(oilspot)/$2.75(gasspot)=22.• NGL(naturalgasliquids)productionisnotreportedtotheTexasRailroadCommissionbutannual

dataisavailablein10-KannualfilingsforcompaniesthatarepureEagleFordplayers.• Anaveragevalueof80barrelspermillioncubicfeetofgaswasused:

Ø 80BPMat42%ofoilvalue.Ø 0.08x(0.42*$60)=$2.02uplift/mcf gas.

• Gasshrinkageof86%:$2.75*0.86=$2.37/mcf.• NGL+Gas:$2.02+$2.37=$4.38/mcf.• BOEconversion:$60/$4.38=14mcf/BOE.• EagleFordwellheadpriceis~$2.20lessthanWTI.• Sanchez’s—theonlypureEagleFordplayerevaluated—2017realizedpricewas$48.60&2017

averageWTIspotpricewas$50.88.


ApplyingEURtoAllWells

• EURfromdecline-curveanalysiswascorrelatedwith12-monthcumulativeproduction.• Theresultingconversionof2.36*12-monthcumulativewasappliedtoallwellswithatleast12

monthsofproduction.• TheresultingEURmaprevealed2coreareasinthenortheasternandsouthwesternpartsoftheplay.• Contourswerecolor-codedto25%IRRat$55wellheadprices(375,000boe EUR).• Numberofacresandproducingwellsinside375kboe contoursweredetermined.• Thenortheasterncoreareaismostlyvolatileoilandisdevelopedon~110acre/welldensity.• Thesouthwesternareaismostlycondensateandisdevelopedon~175acre/welldensity.


EagleFordVariableOperatingExpenses

• Productionexpenses—liftingcosts—are~$9/boe.• Variableoperatingexpenseswere~$14.75perbarrelofoilequivalentin2017basedonEOG&

Sanchez.• Ourlong-termstandard“plug”numberhasbeen$12/BOEbuttheshifttodevelopment&

maintenancemodeintheEagleFordhasincreasedcosts.• $13variableOPEXusedforeconomics(optimistic).• Interestexpensebecauseofhighdebtloadwasasignificantcostformostcompanies.• $5.5mmdrillingandcompletioncosts.


EagleFordEURandEconomicResults

• 2014wasthebestyearforEagleFordEUR:weightedaverageoftopcompanieswas300kboe.• 2013and2015weretheworstyearsevaluated.• 2016wasslightlybetterthan2015.• 2017EURincludesconsiderableuncertaintybecauseofshortproductionhistorybuttheweighted

averagewasslightlylowerthan2016.• TheweightedaverageEURforallcompanies-allyearsis~300kboe withanassociated$50.66/barrel

wellheadorabout$53WTIprice.• At$55wellheadprice(~$57.50WTI)mostcompanieshadpositiveNVP8andIRR>10%.• TheEagleFordplayismarginallyprofitableoverallatprojected2018WTIpricesinthemid-$50

range.• EOG,DevonandConocoPhillipshaveattractiveNPVandIRRatthoseprices.• Using$50asabaseline,approximately1.1billionbarrelsofoilwereproducedatalossin2015&

2016—about45%ofcumulativeEagleFordproductionsince2008of2.4billionbarrelsequivalent.


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WTIPrice($/barrel)

Oil&GasW

ellD

rillingProducerPriceIndex(1985=100)

4-FoldIncreaseInO&GWellDrillingProducerPriceIndexFrom2004-2014

WTIOilPrice(RHS)

Oil&GasWell DrillingCostIndex(LHS)

Source:U.S.Federal ReserveBank,EIA&LabyrinthConsulting Services,Inc.

4-FoldIncreaseinO&GPPIBecauseof

UnconventionalOil&Gas2004-2014

BecauseofHigherCostofUnconventionalTechnology40%DecreaseAfterOil PriceCollapsebut7% Increasein2017

+7%

~40%DecreaseFrom

Deflation

EconomicsAreOptimisticFor2013&2014EagleFord

• Drillingandcompletioncostsbeforeaboutmid-2015wereconsiderablyhigher:$7-9mmperwell.• Economicsareoptimisticforthesewellsbecause$5.5mmwasusedinalleconomics.• Popularperceptionisthatlowerwellcostsareprimarilybecauseofimprovedtechnologyand

operatorefficiency.• Infact,about90%ofcostsavingsarebecauseofpricedeflationaftertheoil-pricecollapsein2014.• Mostwellperformanceimprovementsarebecauseofbettercompletionmethods.• Datasuggests,however,thatmuchofthisisrateaccelerationandnotreserveaddition.


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5.3

2.01.8

1.6 1.5 1.5 1.5 1.4 1.4 1.31.2 1.1 1.1 1.1 1.1 1.0 0.9 0.9

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Parsley

Oasis

Hess

Sanchez

Callon

Energen

Concho

Whitin

g

Laredo

New

field

Statoil

Maratho

n

Apache

Pion

eer

EOG

Diamon

dback

Devon

Continental

Murph

y

OXY EPE

Cono

coPh

illips

RatioofC

apitalExpenditurestoCashFrom

Operations

TightOilIsaMarginalBusinessAtBest73%ofCompaniesLoseMoney(Capex>CashFromOperations)

Basedon10-KFilingsforFullYear2017

MakeMoneyCashFlow>Capex

Lose MoneyCapex>CashFlow

Source:YahooFinance&LabyrinthConsultingServices,Inc.

BreakEven

*Chesapeake hasnotfileda201710-KbutCapex-CashFlowcannotbecalculatedbecausecashfromoperationswasnegativethrough Q32017

10.1

9.4

6.8

6.1

4.8 4.84.6

3.53.3 3.3 3.1 3.1 3.0

2.6 2.6 2.42.1 1.9 1.8 1.7 1.6

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0

2

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Oasis

Sanchez

Hess

Marathon

EPE

Whiting

Parsley

Devon

Callon

Apache

Statoil

Continental

EOG

Murphy

New

field

ConocoPhillips

Laredo

OXY

Energen

Diamondback

Concho

Pioneer

RatioofCapitalExpenditurestoCashFrom

Operations

TightOilIsaMarginalBusinessAtBest:Debt/CashflowOnly23%ofKeyOperatorsHaveAcceptableDebt-to-CashFlowRatios(<2)

45%areRisky(2-4)&32%areUnacceptable(>4)Basedon10-KFilingsforFullYear2017

Source:YahooFinance&LabyrinthConsultingServices,Inc.

Acceptable<2

Risky2-4

Unacceptable>4

*Chesapeake hasnotfileda201710-KbutDebt-CashFlowcannotbecalculatedbecausecashfromoperationswasnegativethrough Q32017

WhereAretheProfits?

• Mosttightoilcompanieslostmoneyin2017basedonfull-year10-Kfilings.• Capitalexpendituresweregreaterthancashfromoperationsfor73%ofevaluatedcompanies.• Riskytounacceptablyhighdebtlevelscharacterize77%oftightoilcompanies.• Companieshavebeenclaimingprofitabilityatpricesbelow2017averagelevels($51WTI)since

2016.• ThisstudysuggeststhatwasnotgenerallytrueintheEagleFordShaleplay.• Corporatefinancialfilingsconfirmtheeconomicsfromthisstudy.• Tightoilremainsamarginalbusinessafter10yearsofproduction.


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MonthlyOilP

roduction(barrels)

MonthsofProduction

ConocoPhillips 2017Wells EagleFordWellsHaveSteeperDeclineRateThanWells FromPrevious YearsDespiteHigherInitialProduction Levels

20132015 2014

2017

Source:Drilling Info&LabyrinthConsultingServices,Inc.

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MonthlyOilProduction(barrels)

MonthsofProduction

Sanchez2016&2017EagleFordWellsHaveSteeperDeclineRatesThanWells FromPrevious Years

2016 20132015 20142017


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MonthllyOilProduction(barrels)

MonthsofProduction

EOG2016&2017Wells EagleFordWellsHaveSteeperDeclineRateThanWells FromPreviousYearsDespiteHigherInitialProduction Levels

2013

20152014

2017


2016

InitialHighProductionRatesCanBeDeceptive

• Cumulativeproductioncomparisonsindicatethatwellperformanceinrecentyearsispoorerthaninpreviousyears.

• 2017wellsforEOGandConocoPhillipshadhighinitialproductionratesbutsteeperdeclineratesthan2016wells.

• 2017wellsforthesecompaniesarelikelytohavelowerEURsthan2016wellsasaresult.• EOG2016wellsappeartobecrossing2015trendsandmayhavelowerEURsthaninthatyearalso.• Sanchez2017and2016wellsappeartobemuchworsethanwellsinmostpreviousyears.• Thesecomparisonsrepresentaveragesbutsuggestthatclaimsofperformanceimprovementsmay

bepremature.


ImplicationsforFutureProduction

• EURanalysisandcumulativeproductioncomparisonssuggestthatmuchoftheEagleFordisprobablyatorbeyondoptimumdevelopment.

• HighEURsforEagleFordsuggestlargedrainageareas.• Currentwellspacingof100acresprobablyexceedsoptimuminfill.• Poorerlate-yearwellperformancemaybeduetowellinterference.• Operatorstalkaboutthepotentialofofdevelopingadditionalzones.• Thisisalwaysapossibilitybutitseemsreasonablethattheseotherlevelsarealreadycontactedby

exitingfrackverticaldimensions.• ThisstudyconfirmstheattractivenessoftheEagleFordplaybutsuggeststhatitsbestdaysmaybe

inthepast.


• ThisstudyshowsthatEagleFordwellsfortopoperatorsaverage300kboe butmanyoperatorsclaimEURsthatareconsiderablyhigher.

• PartofthedisparityisexplainedbyBOEconversionfactors:abarrelofNGLsiscountedthesameasabarrelofoileventhoughitsenergycontentandvaluearelessthanhalfofabarrelofcrudeoil.

• A6:1naturalgastoboe conversionaccuratelyreflectsenergycontentbutnotvalue.• Sanchezshowshowitarrivesat877boe foranaverageComancheAreawell.• Usingthevalue-basedapproach,theaverageSanchezComanchewellis572boe--adifferenceof

35%.• 877boe alsorepresentsa“3-StreamEUR”consistingofmultiplezonecompletioninupper&lower

EagleFord&AustinChalk.Thisissomewhatmisleadingandrepresents“possible”notprovenreserves.

• Itisunclearhowrepresentative“ComancheArea3”isofSanchez’saveragewells.

ReconcilingStudyEURObservationsWithOperatorClaims


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peted(DUC)W

ells

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pletedPerM

onth

MoreEagleFordWellsBeingCompletedin2018vs2017WithHigherOilPrices&MoreFrackCrews

1,492EagleFordDUCs(drilleduncompletedwells)315DUCsaddedsinceNov2016

DUCs(RHS)

Drilled

Completed

Source:EIA&LabyrinthConsulting Services,Inc.

EAGLEFORD

YEAR Drilled Completed DUC DUCs/Mo PCTDUC/WellsDrilled2018YTD 356 293 14 7 4%2017 1,982 1,697 285 24 14%

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Crude+ProductComparativeInventoryDecreased-4.3mmbWeekEndingMar9

Comparative Inventory (C.I.)Millionsof Barrels

WTIPrice($/barrel)

Source:EIA

&LabyrinthConsultingServices,Inc.-Aperio

EnergyResearch

Mar-June 2015FalseOptimism

Early 2017OPECProduction-Cut Optimism

2012-13MarketOptimism

Late2015-Early2016MarketPessimism

Mid-CyclePrice~$65

Mid-CyclePrice~$73

Long-TermYieldCurve

Emerging2018YieldCurve?

Comparative Inventory (C.I.)Millionsof Barrels

WTIPrice($/barrel)

Source:EIA

&LabyrinthConsultingServices,Inc.-Aperio

EnergyResearch

Mar-June 2015FalseOptimism

Early 2017OPECProduction-Cut Optimism

2012-13MarketOptimism

Late2015-Early2016MarketPessimism

Mid-CyclePrice~$65

Mid-CyclePrice~$73

Mar9$61.65

Larger-than-Avg CrudeAddition (+5.0vs+3mmb5YA)OffsetbyLarger-than-AvgGasoline(-6.3vs-2.6mmb5YA)&Distillate(-4.4vs-0.7mmb5YA)Withdrawals

WTICorrectly PricedatWeeklyAvg$61.05PriceBasedonEmerging2018YieldCurve

ImplicationsforFutureOilPrices

• Oilpriceshavebeenstagnantforseveralweeksafterreaching$66WTIinearlyFebruary.• Pricesareabove$65todaybutoiltradersarebearishaboutthedirectionofpricesin2018.• IEAandEIAhavewarnedabouttheexplosionoftightoilproductionandU.S.supplyisabove1970

recordhighlevels.• Therigcounthasdoubledatmostlysub-$50pricesandthenumberofdrilled,uncompletedwells

continuestogrow.• Itislikelythatthemarkethasre-pricedoildownwardbecausethereisadequatetomore-than-

adequatesupplyforthenearterm.• $65+/- mayrepresentthehighmarkfortheunfoldingnextpricecycleandthepossibilityof

downsideisatleastashighashigherprices.


ConcludingObservations

• TightoilplayshaveaddedadecadeofadditionalsupplytotheU.S.• Reservesarenotlarge(15billionbarrels)byglobalstandardsespeciallyconsideringthe~90,000

currentwellsneededtoproduce5mmb/d.• Tightoilismoreexpensivethanconventionalplaysbecausehorizontaldrillingandhydraulic

fracturingiscostly(despitelowerprices).• ThepresentpriceofWTIis2.5timeshigherthanaverageprices1986-2004inconstant2017dollars.• Technologydoesnotcreateenergy.Itpermitsextractionofknownresourcesathigherrates.• Tightoileconomicsaremarginaltodatealthoughcurrentpricesshouldmakemostplaysprofitable.• Over-productionwasthemainfactorintheoil-pricecollapsein2014.Resurgentover-productionis

likelytodepresspricesagain.• Tightoilvolumeshavesurprisedmanyanalysts.• Futuresupplyissolelydependentoncapitalmarkets.

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6 Au

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CPIAdjustedW

TIPrices(October2017DollarsPerBarrel)

1974-1985OilShocks

-->

Massive E&PInvestment(North

Sea,Mexico,Siberia)

Over-Supply, DemandDestruction&Price

Deflation

Debt-FueledEconomic

Expansion&RapidGrowth

inChina&EastAsia

2004-2014MassiveE&PInvestment

(Shale, DeepWater,HeavyOil)

2015-2017Over-Supply

&Price

Deflation

Average2015-2018WTIPrice2.5TimesHigher

ThanAverage1986-2004inFeb2018Dollars

Source:EIA, U.S.Bureau ofLaborStatistics &LabyrinthConsulting Services,Inc.

$36Avg

1stBubble 1974-1985

2ndBubble2004-2013

$93Avg

$71Avg

$24

Avg

$50

Avg

DepressedPrices 1986-2004

46%LowerThan2004-2014&29%LessThan1974-1985