Tight Oil and The Willing Suspension of Disbelief College of the Coast & Environment Louisiana State University November 22, 2019 Art Berman Labyrinth Consulting Services, Inc. Labyrinth Consulting Services, Inc. Slide 1 artberman.com
“Energy is and always will be the currency of life” –Nate Hagens Any movement, activity or event in nature requires energy • Human society runs on energy • Ø Work requires energy—joules/calories. Ø Subsistence: energy intake = energy expenditure. Ø Surplus: energy intake > energy expenditure. Ø If I accumulate excess energy such as grain, I may choose to have you do some of my work in exchange for some of that energy. Money is a call on work • Ø Today, most work is done by oil, natural gas and coal. Ø 1 barrel of oil contains about 4.5 years of human manual labor. Labyrinth Consulting Services, Inc. Slide 2 artberman.com
Wind was 2.5 % of U.S. Primary Energy Consumption & Solar was 0.9% Energy is the Economy For now, that means oil, natural gas and coal v 2.5% 5.1% 0.9% 2.7% Coal 8.3% 13.1% Natural Gas 30.6% Petroleum 36.5% Source: EIA & Labyrinth Consulting Services, Inc. Table_1.3_Primary_Energy_Consumption_by_Source COAL NATURAL GAS PETROLEUM NUCLEAR HYDRO GEOTHERMAL SOLAR WIND BIOMASS Labyrinth Consulting Services, Inc. Slide 3 artberman.com
U.S. oil production peaked in 1970 & declined by almost 50% by 2008 18 Production surpassed its previous peak in 2017 because of tight oil 16 14 Crude Oil and Condensate Production (mmb/d) 12 Prudhoe Peak OIl 2018 Bay 1970 10.74 1985 9.64 10 Tight 8.97 Oil 8 Alaska 2008 6 5.00 Offshore 4 Conventional Lower 48 States 2 0 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 Source: EIA, EIA AEO 2019, Drilling Info & Labyrinth Consulting Services, Inc. EIA 2019/Monthly Updates/CRUDE OIL PRODUCTION ANNUAL.xlsx. Labyrinth Consulting Services, Inc. Slide 4 artberman.com
Labyrinth Consulting Services, Inc. Slide 5 artberman.com
Labyrinth Consulting Services, Inc. Slide 6 artberman.com
Labyrinth Consulting Services, Inc. Slide 7 artberman.com
U.S. Tight Oil & Shale Gas Plays Labyrinth Consulting Services, Inc. Slide 8 artberman.com
Conventional and Unconventional Oil Conventional oil plays involve drilling reservoir rocks with vertical wells. • After all the commercially attractive conventional fields in the U.S. were discovered and • were in depletion, unconventional plays were the only option. Tight oil plays (fracking) involve drilling the source rock with horizontal wells. • Tight oil horizontal wells cost 2-3 times more to drill and complete than conventional • vertical wells. There is considerable fanfare about the new volumes of oil but little discussion about the • cost of the technology and its effect on the price of oil. Labyrinth Consulting Services, Inc. Slide 9 artberman.com
Labyrinth Consulting Services, Inc. Slide 10 artberman.com
All increase in U.S. production since 2011 has been tight oil Chart Title 55% of U.S. crude + condensate production is from tight oil plays 14 14% is from deep water and 31% is from conventional plays 2019 average 12,131 b/d 12 Crude Oil + Condensate Production (mmb/d) 10 +6,700 bopd 8 Tight Oil 6 2000-2011 average 5,440 b/d Deep Water 4 Conventional 2 0 Jan-00 May-00 Sep-00 Jan-01 May-01 Sep-01 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 CONVENTIONAL DEEP WATER TIGHT OIL 2000-2011 AVG 2019 AVG Source: EIA DPR, Drilling Info & Labyrinth Consulting Services, Inc. EIA 2019/DUC-DPR/U.S.UNCONVENTIONALVS CONVENTIONAL MASTER Labyrinth Consulting Services, Inc. Slide 11 artberman.com
Labyrinth Consulting Services, Inc. Slide 12 artberman.com
Labyrinth Consulting Services, Inc. Slide 13 artberman.com
High oil prices & inflation caused negative demand growth during oil shocks of 1970s Chart Title 2011-14 high oil prices not accompanied by negative demand growth 35 3.0 possibly because of long-term decline in interest rates & inflation World Oil Demand Growth (mmb/d/yr), 10-Year U.S. Treasury Bond Rate (%) 30 2.5 High Oil Prices 1978-80 U.S. Consumer Prices Inflation Rate Growth (Annual Percent) Oil Shock 2019 25 2.0 1973-74 Brent Price Oil Shock Index 20 1.5 and 2019 Brent Price Index Inflation Inflation Growth 15 1.0 2008 Financial (RHS) Collapse 10 0.5 Interest Rates 5 0.0 Oil Demand + 0 -0.5 Oil Demand - Financial Collapse Negative Demand -5 -1.0 Jan-71 Jan-72 Jan-73 Jan-74 Jan-75 Jan-76 Jan-77 Jan-78 Jan-79 Jan-80 Jan-81 Jan-82 Jan-83 Jan-84 Jan-85 Jan-86 Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 10-Yr Treasury Bond Rates INFLATION OIL DEMAND GROWTH POS OIL DEMAND GROWTH NEG CPI BRENT INDEX INFLATION GROWTH Source: EIA & Labyrinth Consulting Services, Inc. Oil & Gas General/Inflation Annual Master Labyrinth Consulting Services, Inc. Slide 14 artberman.com
42 Billion 2017 Reserves Highest in U.S. History from +4.4 Billion Tight Oil Increase 20 55 Reserve forecast based on production forecast implies step-change in U.S. reserve levels 2018-2030 annual reserve additions based on 2009-2017 historical average 50 18 U.S. Crude + Condensate Proved Reserves & Reserve Forecast (billions of barrels) 2017 45 16 42 Not realistic 40 U.S. Production & Production Forecast (mmb/d) 14 Production Forecast 35 35 (LHS) 12 30 10 25 8 Production Proved Reserves Forecast 20 (LHS) (RHS) 6 15 4 10 Proved Reserves (RHS) 2 5 0 0 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 EIA 2019/AEO 2019/Table 14. Oil and Gas Supply.xlsx Source: EIA, EIA Annual Energy Outlook 2019 & Labyrinth Consulting Services, Inc. Labyrinth Consulting Services, Inc. Slide 15 artberman.com
IEA tight oil forecast for 11 mmb/d in 2030 exceeds EIA AEO 2019 forecast by 7% 150 14 2019 EIA estimate already +0.7 mmb/d (+10%) too high Adjusted forecast suggests peak tight oil production of 8.5 vs 10.3 mmb/d in 2031 130 12 112 billion barrels 10.28 Proved Reserves & Cumulative Prodtion (billions of barrels of oil) 110 10 Production Forecast EIA Tight OIl Production Forecast (mmb/d) 2031 91 billion barrels (RHS) 90 8.53 8 8.38 Adjusted Forecast 7.63 (RHS) 70 6.95 2019 6 50 Proved Reserves Cumulative Production Depleted in 2023 (LHS) 4 2026 30 20 billion barrels 2 10 2017 Tight Oil Proved Reserves 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 -10 0 EIA 2019/AEO 2019/Table 14. Oil and Gas Supply.xlsx Source: EIA Annual Energy Outlook 2019 & Labyrinth Consulting Services, Inc. Labyrinth Consulting Services, Inc. Slide 16 artberman.com
Labyrinth Consulting Services, Inc. Slide 17 artberman.com
95% of sampled tight oil companies Chart Title 4.00 had negative cash flow in Q1 2019 Capital expendiures/cash 3.50 from operating activities 3.00 Capital Expenditures/Cash from Operations Ratio 2.82 2.59 2.50 Capex/Cash Flow > 1 2.09 2.01 2.00 1.77 1.74 Capex/ 1.48 Cash Flow 1.45 1.44 1.40 1.50 1.37 1.36 < 1 1.24 1.24 1.23 1.15 1.09 1.04 1.00 0.57 0.50 0.00 HES CPE FANG LPI PE EPE DVN CXO APA OXY CRZO OAS MUR EOG PXD ECA MRO CLR COP HES CPE FANG LPI PE EPE DVN CXO APA OXY CRZO OAS MUR EOG PXD ECA MRO CLR COP Source: Yahoo Finance & Labyrinth Consulting Services, Inc Oil & Gas General/Sampled E&Ps/Sampled E&Ps MASTER Labyrinth Consulting Services, Inc. Slide 18 artberman.com
61% of tight oil-weighted U.S. companies had positive cash flow in Q3 2019 Chart Title compared to only 50% in Q2 3.00 1.6 Good correlation between cash flow & net income-to-enterprise value ratio 1.4 2.50 Capital expendiures/cash Normalized 1.2 from operating activities Net Income-Enterprise Capital Expenditures/Cash from Operations Ratio 1 Value Ratio (RHS) Normalized Net Income-Enterprise Value 2.00 Capex/Cash Flow > 1 0.8 1.50 0.6 1.50 1.49 1.41 0.4 1.27 1.09 1.08 1.07 1.00 Capex/Cash Flow < 1 1.00 0.2 0.81 0.90 0.89 0.86 0.75 0.75 0.75 0.73 0 0.61 0.50 0.56 -0.2 0.00 -0.4 APA FANG HES CPE PE CXO WLL PXD MRO DVN CLR LPI EOG OAS ECA OXY MUR COP CAPEX/CF NORM NI-EV Linear (NORM NI-EV) Source: Yahoo Finance, SEC 10-Q filings & Labyrinth Consulting Services, Inc Oil & Gas General/Sampled E&Ps/Sampled E&Ps MASTER Labyrinth Consulting Services, Inc. Slide 19 artberman.com
Recommend
More recommend
