[Islander]

The U.S. drive for energy independence is backed by a surge in junk-rated borrowing that’s been as vital as the technological breakthroughs that enabled the drilling spree. While the high-yield debt market has doubled in size since the end of 2004, the amount issued by exploration and production companies has grown nine-fold, according to Barclays Plc. That’s what keeps the shale revolution going even as companies spend money faster than they make it.

http://www.businessweek.com/news/2014-0 ... eadmill#p1

[ROCKMAN]

Islander - Exactly. I was just making that point to Pops elsewhere. Digging themselves into a long term debt hole obviously isn't a good plan. Guess what: the oil patch doesn't care. There is no long term plan so the damage from all that debt isn't important. The plan is to max short term profits. And for most that means increasing the value of the pubcos' stocks. Once the stocks are sold and the profits monetized what happens to the companies down the road is of no consequence to the current owner's: the debt and repercussions won't be their problems. So again: it ain't personal...just business.

[Pops]

And surprisingly all that capital came along right after the jig was up on the real estate-ish boom which came right on the heels of the dot.com bubble popped which was preceeded by the Clinton Capitulation and deregulation at a time when the best trickle up republicans since Regan were the democrats.

[ROCKMAN]

Pops - So what...you were expecting some massive evolution of the human brain? LOL. As a broker explained a very long time ago: Wall Street sells the sizzle...not the steak...or the pork chop...or the chicken fajitas. It doesn't matter what the commodity is as long as a commission can be made. After the oil bust they might be hyping tapioca mines next. Doesn't matter as long as there a vehicle to separate folks from their money. In the oil patch we refer to similar investments as: "money disposal wells". We really use that term.

[Pops]

LOL, that's good ROCK

[peterjames]

Surely the beliefs that the shale industry is unsustainable arent to be believed. Just look at Sanchez Energy who have just released their 3 monthly results. For the last 3 months, they got roughly 1.8 million boe out of the ground, and made a whopping 3.4 million dollar nett profit. That is nearly $2 for every barrel of oil. They did so well, they were even able to pay out $18 million in dividends (although this did lead to a loss to stockholders of nearly $15 million). At a time of record low interest rates, and high oil prices (where your competitors produce 60 times more product at a much cheaper manufacturing cost), why wouldnt anyone think this is a business to get into.

[Subjectivist]

Surely the beliefs that the shale industry is unsustainable arent to be believed. Just look at Sanchez Energy who have just released their 3 monthly results. For the last 3 months, they got roughly 1.8 million boe out of the ground, and made a whopping 3.4 million dollar nett profit. That is nearly $2 for every barrel of oil. They did so well, they were even able to pay out $18 million in dividends (although this did lead to a loss to stockholders of nearly $15 million). At a time of record low interest rates, and high oil prices (where your competitors produce 60 times more product at a much cheaper manufacturing cost), why wouldnt anyone think this is a business to get into.

Maybe I am just slow in my head tonight, but a $2.00 per barrell profit hardly seems worthy of boasting. KSA was getting $10.00 per barrell profit in 1980 in money that bought a lot more than it does now after 34 years of inflation.

[Quinny]

I think/hope peter was being sarcastic?

[kuidaskassikaeb]

There is something weird about this, in that this should not be a business with a cash flow problem, except when it is growing rapidly.Almost all the product comes back very fast, they don't have to wait 20 years for the wells to deplete. They are talking about 2 year paybacks. This also really reduces risk from price fluctuations.

Anyway another possible cause of the money problems is the extreme differences in well outputs. The best wells produce 100 times more output than the worst wells, and they don't seem to be able to tell which it will be before drilling. So if your company hits a good well it will make a lot money no matter what the price is, but most wells will be money losers. If I was running these companies I would just sell the investment as a lottery ticket, and limit the number of wells per ticket.

[rockdoc123]

There is something weird about this, in that this should not be a business with a cash flow problem, except when it is growing rapidly.Almost all the product comes back very fast, they don't have to wait 20 years for the wells to deplete. They are talking about 2 year paybacks.

High costs and low rates mean this is a marginal business. The operators understood that going in and the key is scale. As an example EOG produces about 170,000 bopd out of the Eagleford. Last year they drilled 466 wells and using my guesstimate rule of thumb that would have meant about $2.7 billion of capital exposure. Its a capital intensive business to keep production up (initial declines met by continuous drilling)

[ROCKMAN]

k - IMHO you have a very good sense of what chasing fractured reservoirs is all about. Drill a conventional prospect and you find commercial pay and you run casing. No pay? Plug and abandoned. But a fractured reservoir? You can get some hints as to productivity while drilling but not much to do any sort on quantitative analysis. Here's a real life example: one of the last projects I did for Devon was analyzing a Haynesville Shale well they drilled. Absolutely zero indication of productivity. And yet the well came in making 6 million cubic feet and 80 bbls of condensate per day. And they did something very rare: cut a full diameter core from the horizontal section they drilled. They wanted to know why this great well looked like a loser while drilling. By looking at the core I had an easy answer: because the well was a loser when the drilled it. There was absolutely no productive reservoir in the core...zilch...nada...not a sniff. LOL. But when the frac'd the well it reached out an cut some productive rock. And guess what...there was no way of knowing that potential was there. They could have easily spent $2 million to ffrac it and still had a money loser.

So in the end it's a numbers game: one has to drill enough wells to average out the stinkers with the goodies. Of course while that may be the plan reality will occasionally raise its ugly head. Take Shell Oil and the $1 billion they paid for a Eagle Ford Shale lease and the several $billion they spent drilling and completing about 185 wells. With that many the should have hit a good average, eh? I ran the numbers for the average initial production of the 185 wells they had tested to date: 79 bopd. And that's the average before the notorious high decline rate set in. Is it any wonder Shell Oil bailed on all their US shale plays after posting a $2 billion loss?

And trust me: it has never been easy. Folks think those big heritage fields were easy to find. They weren't. In them olden days it wasn't uncommon for a successful company to have a success rate under 20%. Lots of dry holes all across the US. But the difference was when you did make a discovery it was big and paid for a lot of dry holes. Some old fields had 50 to 100 relatively low risk development wells following the risky wildcat. And there were a lot of dry holes. I've made this point before and I'm sure some still don't believe me: with the technology we have today it's so much easier to find the oil/NG that is left out there. Using one such tech back in the mid 80's I hit 23 out of 25 wells. But they were small fields...most were just one well fields...no low risk development wells.

The problem isn't an inability to see the potential. The problem is that there is little potential left to look for now compared to 40 or 50 years ago.