What Wells Work at $30: Comps
“…we don’t disclose decline rates… that’s kind of one of those things – kind of an entrapment question, so that’s just something that we really don’t want to talk about” - Mark Papa
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For shale, does $2.50 HH work better than $40 WTI?
That’s a question we haven’t really considered, until now -
The Houston Chronicle is reporting that the Marcellus has more active frack crews than Permian:
“The Marcellus, which is rich in natural gas, has 31% of the active hydraulic fracturing crews in the field, followed by the oil-rich Permian, with 30%…”
At the same time, Bloomberg is reporting that the number of US rigs drilling for oil & gas fell to 237, the lowest since ‘09.
But still, we’re surprised to see the Marcellus being the last to go…
We’re not totally convinced it’s about economics.
We’ve seen our fair share operators drill uneconomic wells in the past -
On Friday, Heik & TPH discontinued coverage of Centennial, Callon, & QEP.
The down-cycle of Equity Research is a strange one…
Sell ratings anger management
Selling stocks that go bankrupt is obviously bad for the investor base
So, what’s left to do?
These assets aren’t going to disappear.
And the management teams will probably stick around, in one way or another…
Definitely worth keeping the relationships.
That said - and not that it really matters… but, we like how Heik handled the communication around this situation -
“At the same time, Heikkinen isn’t completely abandoning ship. The firm intends to follow these companies by ‘maintaining relationships with management, updating models and providing production and financial estimates’” - Bloomberg
The conflicts of incentives in the advisory & research / sales / trading business model creates situations that requires extreme care & precision to navigate.
We like how Heik walked this tightrope -
WHAT WELLS WORK AT $30.
The rules of the game have been:
Sunk costs are sunk (& excluded)
Used 2019 vintage wells
WTI, flat @$30/bbl
Results: on average, most works don’t work at $30.
In fact, almost all wells fail to break even -
With low prices, steep declines wreck economics:
‘When asked about his company’s decline rates earlier this month, Cimarex CEO Tom Jorden responded, ‘I hate it’” - Bloomberg
And when you bake-in G&A, F&D, interest expense, etc. …
… we have to ask:
If you’re not fully hedged at $55, then why are you drilling?
Look, there are hypothetical answers -
Lease clauses, sunk / prospective cost analyses, etc.
But we’d like to the hear them, & to see the logic that backs them up -
Russia protects its refiners
Trafi takes a North Sea bet
UK dismisses Nigeria’s $1BN bribery lawsuit
And from the Twitter water-cooler - PE portfolio company roll-ups -
That’s it for today - we’ll be back Friday - hope y’all enjoyed the long weekend -