A sharp decline in oil prices over the past four months has called into question the sustainability of North American shale production. Global benchmark Brent crude has fallen about 30 percent since June due to oversupply, weakening demand and indications that key oil producers, particularly Saudi Arabia, have limited appetite to intervene in prices. Bernstein Research said earlier this year that about a third of U.S. shale production would be uneconomical if oil prices were to fall to $80 per barrel.
Jim Noe, executive vice president at Hercules Offshore Inc., (HERO), a Houston-based drilling-services company with rigs in the Gulf of Mexico, the Mideast, India and West Africa, said companies such as his are monitoring weak oil prices closely. The decline in oil has brought well-placed fears that deepwater and ultra deepwater oil operations will be significantly cut back. Because Seadrill (SDRL) is one of the most leveraged rig lessors, shares have sold off more than most.
Atwood Oceanics (ATW), Noble (NE) and Ensco (ESV) are also feeling the pressure from lower oil prices.
According to a report by research consultancy IHS Energy, most shale plays are economic and ~80% of potential drilling in 2015 would remain strong at WTI crude oil prices as low as $70 per barrel.
“Since 2008 the cumulative growth in U.S. tight oil production has been 3.5 million b/d—far exceeding supply gains from the rest of the world combined—making tight oil the key driver of global supply growth,” said Jim Burkhard, Vice President, IHS. “While current lower crude oil prices do present challenges for new investment, IHS analysis shows that the vast majority of potential U.S. supply growth in 2015 remain economical at $70 for WTI.”
What is the Eagle Shale Formation?
The Eagleford Shale is a shale rock formation located in multiple counties in South Texas. The Eagle Ford Shale Formation has been one of the hottest shale plays this year because several companies are finding huge pools of oil & natural gas. Oil can be found in McMullen County, Texas while Natural Gas has been found in the Eagle Ford Shale located in La Salle County, TX.
The Eagle Ford Shale is over twice as large as expected. Producing 2.5 times the number of wells AND output – according to a speech delivered by John Cornyn (R-Texas) at the final day of the Eagle Ford Consortium, here in San Antonio.
There are over 200 active operators in the 30 county area that is prospective for the Eagle Ford Shale.
Overproduction of frac sand is a risk.
Demand for frac sand has been growing at 28.3% annually and is expected to continue growing at over 10% through 2022.
In fact, U.S. Silica has seen such a surge in demand that it was able to raise prices by an average of 20% this year, and recently announced that it sold out of production through mid-2018.
This kind of surging demand has resulted in major production expansion throughout the industry. For example here are the growth plans for U.S. Silica, Emerge Energy Services, and Hi-Crush Partners, the three largest suppliers in the industry.
- SLCA U.S. Silica: 102% planned capacity growth over next two years
- EXP Emerge Energy Services: 68% increased capacity by the end of 2015
- HCLP Hi-Crush Partners: 325% capacity growth in just one year
The long-term contracts these companies have secured for this increased production means that a short-term decline in energy prices, and thus demand for frac sand, isn’t a major concern. However, should slowing global economic growth or recession result in a long-term reduction (three to five years) in energy prices, then U.S. Silica and its peers will face the prospect of their current lucrative contracts expiring and themselves sitting atop literal mountains of frac sand, while demand may have fallen off a cliff. This might result in frac sand prices crashing and could eviscerate these companies’ margins and share prices in the long term.
KLR GROUP (Oct. 22)
“The U.S. E&P industry needs (more than) $90 NYMEX, about $100 Brent, oil prices to maintain the current oil rig count of 1,500-1,600 rigs, which is intrinsic to our U.S. oil production outlook. A comparable NYMEX oil price is needed to maintain the projected pace of Canadian oil sands development.”
MORNINGSTAR INC (Oct. 21)
“Our analysis suggests that the average breakeven for our E&P coverage is $70 per barrel, well below our $90 per barrel marginal cost and below today’s $80 per barrel WTI (West Texas Intermediate) oil price.” “Our estimate of the marginal cost for oil remains $90 per
barrel WTI and $100 per barrel Brent.”
BERNSTEIN RESEARCH (Oct. 20)
“We estimate that about a third of U.S. shale oil production is uneconomic at $80 per barrel WTI. We disagree with other estimates, including those cited by the IEA, which suggest the vast majority of shale oil production is robust at such prices. Our expectation is that (the) oil price will revert back to a level where a much smaller portion of production is uneconomic.”
ROBERT W. BAIRD EQUITY RESEARCH (Oct. 14)
“We estimate $73 as the weighted average breakeven point for U.S. supply.”
SHALE FIELD BREAKEVEN OIL PRICE PER BARREL
Eagle Ford Liquids Rich $53
Wolfcamp North Midland $57
Bakken Core $61
Niobrara Extension $64
Eagle Ford Oil $65
Niobrara Core $68
Wolfcamp South Midland $75
Bakken Non Core $75
Texas Panhandle $81
Mississippi Lime $84
Barnett Combo $93
MORGAN STANLEY (Oct. 14)
“U.S. oil shale is moving down the cost curve and adding to the global oil production mix as operators continue to improve drilling and fracturing performance – essentially getting more from shale wells for less capex.”
“U.S. shale is now no longer the marginal barrel, with cash breakevens in some major U.S. shale plays having dropped by up to $30 per barrel since 2012.”
SHALE BREAKEVEN OIL PRICE PER BARREL OF OIL EQUIVALENT
US EAGLEFORD $60-80
UBS INVESTMENT RESEARCH (Oct. 14)
BASIN BREAKEVEN OIL PRICE PER BARREL
EAGLE FORD $43.34
MIDLAND NORTH WOLFCAMP $52.56
MIDLAND SOUTH WOLFCAMP $62.74
DELAWARE BONE SPRING $64.67
DELAWARE WOLFCAMP $74.86
MISSISSIPIAN LIME $85.54
DELAWARE AVALON $85.87
ANADARKO BASIN $88.83
STIFEL, NICOLAUS & CO INC (Oct. 13)
“The weaker portions of several U.S. shale plays, or newer areas that are in the delineation phase and have not benefited from development drilling, require oil prices above $80 per barrel in order to generate a pretax internal rate of return of 20 percent, which is a reasonable threshold for most companies.”
WELLS FARGO SECURITIES (Oct. 13)
“If the crude oil market believes a price-driven market share war is under way and 2015 demand growth will be meaningfully lower than prior expectations, then our updated view is that U.S. onshore 2015 E&P budgets would need to be trimmed so as to moderate production growth relative to lower demand expectations. “In such an environment we estimate that WTI prices of $85-90 per barrel versus our current estimate of $96 per barrel would be required.”
GOLDMAN SACHS (Oct. 10)
BASINS BREAKEVEN OIL PRICE PER BARREL
BAKKEN CORE, $70-$80
PERMIAN DELAWARE, UTICA, EAGLE FORD OIL & $80-$90
WET GAS BAKKEN NON-CORE $90-$110
CREDIT SUISSE (Sept. 30)
BASIN BREAKEVEN OIL PRICE PER BARREL
Marcellus Shale – SW liquids rich $24.23
Marcellus Shale – Super Rich $25.63
Utica – Wet gas $32.39
Mississippian Horizontal – East $42.15
Utica – Liquids Rich $44.04
Eagle Ford – Liquids Rich $46.05
Niobrara – Wattenberg $46.10
Wolfcamp – N. Midland (Horizontal) $53.92
Eagle Ford – Oil Window $55.29
Wolfcamp – S. Midland (Horizontal) $61.57
Mississippian Horizontal – West $64.05
Bakken Shale $64.74
Wolfcamp – N. Delaware (Horizontal) $68.54
Uinta – Green River $68.77
Uinta – Wasatch (H) $72.15
Granite Wash – Liquids Rich $73.10 Horizontal
Uinta – Wasatch (V) $74.95
Barnett Shale – Southern Liquids $84.45 Rich
Here’s a look at four stocks that are benefiting as shale oil remakes the country’s energy future.
EOG Resources (NYSE: EOG) is the fifth largest non-integrated oil and gas company in the U.S. and one of the top five Bakken stocks by oil and gas production. It’s also the largest oil producer in the Eagle Ford formation in Texas. The company is by far the largest horizontal crude oil producer in the U.S., with nearly 200,000 barrels per day (bpd) of crude oil produced by horizontal drilling at the end of 2012. EOG increased its crude and condensate output by 39% last year.
Continental Resources (NYSE: CLR) is a pioneer among Bakken stocks. It was the first to complete a horizontal well in the Three Forks formation, and to date the company has drilled about 20% of all Three Forks wells. Today, Continental is the largest leaseholder and oil producer in the Bakken, with more than 1.1 million acres leased.
Whiting Petroleum (NYSE: WLL) is the second-largest oil producer in North Dakota, averaging 82,500 barrels of oil equivalent (boe) of production in 2012 across more than 700,000 acres of leased land.
Oasis Petroleum (NYSE: OAS) is a pure Bakken/Three Forks play, with 335,000 leased acres in the Williston Basin. Oasis has only been a public company for three years, but the share price has risen 143% since its 2010 IPO.
Range Resources Corporation (NYSE: RRC) operates as an independent natural gas, natural gas liquids (NGLs), and oil company in the United States. The company acquires, explores, and develops natural gas and oil properties. It holds interests in developed and undeveloped natural gas and oil leases in the Appalachian and Southwestern regions. The company owns 6,136 net producing wells; and approximately 1.6 million gross acres under lease in the Appalachian region. It also owns 1,538 net producing wells; and approximately 710,000 gross acres under lease in the Southwestern region. In addition, the company owns gas gathering and transportation pipelines.
Cabot Oil & Gas Corporation (NYSE: COG), an independent oil and gas company, is engaged in the development, exploitation, exploration, production, and marketing of natural gas, crude oil, and natural gas liquids in the United States. The company primarily focuses on the Marcellus Shale in northeast Pennsylvania with approximately 200,000 net acres in the dry gas window of the play; and the Eagle Ford Shale in south Texas with approximately 60,000 net acres in the oil window of the play.
Southwestern Energy Company (NYSE: SWN), an independent energy company, is engaged in the exploration, development and production of natural gas and oil in the United States. The company operates in two segments, Exploration and Production, and Midstream Services. The Exploration and Production segment focuses on the Fayetteville Shale, an unconventional natural gas reservoir covering approximately 905,684 net acres in Arkansas; and the Marcellus Shale an unconventional natural gas reservoir covering approximately 292,446 net acres in Pennsylvania, as well as involved in exploration and production activities in Texas, and in Arkansas and Oklahoma in the Arkoma Basin. The Midstream Services segment is engaged in the natural gas gathering and marketing activities in Arkansas, Texas and Pennsylvania.