Oil bust

[mauser96]

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I am going to be looking at smaller producers. I like the EagleFord area.

the highest cost producers that don’t go broke first will benefit the most from an uptrend in oil prices. But if this is like earlier busts it will take maybe a couple of years rather than a few months to play out… Both supply and demand change slowly. You can’t just shut down wells, some won’t restart with out reworking. Some drilling continues to hold leases even at a loss.

Best from an investment standpoint would be recession (itself enough to drive down oil prices) combined with the tail end of the present over supply/under demand. Since this is an old bull market that is certainly possible. And one should not ignore the possibility that declining oil prices are the actual harbinger of deflation in other items, i.e. a general recession.

In any case there is no rush to invest.

It would be worth studying past oil busts, which date back to the 1860’s
http://en.wikipedia.org/wiki/Pennsylvania_oil_rush

The rush to Pennsylvania created violent swings in the petroleum market for the first decade of the oil boom. In 1861, the explosion of wells across the Oil Creek Valley pushed the price of oil down to 10 cents a barrel. In response, producers in the region formed the Oil Creek Association to restrict output and maintain a minimum price of $4 a barrel.[13] Despite efforts such as this to control the petroleum market, the volatile boom-bust cycle continued into the early 1870’s

Unless you believe crude oil prices are never coming back, at the right time this could be real winner. I am going to start looking for producers with costs of $60 or less, little or no debt, in fields like EagleFord where technology (engineering ) rather than geology is the main factor, where regulation is not oppressive, and in the US.
Geology is hit or miss, engineering gets better with time.

[rjf53]

I am going to be looking at smaller producers.

No Shortage of names to choose from.
Bakken

AMZG Nov. -50.53% YTD -88.54%
AXAS Nov. -17.49% YTD -1.96%
CLR Nov. -27.21% YTD -27.16%
EOX Nov. -44.02% YTD -74.93%
KOG Nov. -29.79% YTD -34.61%
NOG Nov. -20.93% YTD -42.34%
OAS Nov. -38.43% YTD -60.87%
TPLM Nov. -38.60% YTD -42.07%
WLL Nov. -30.42% YTD -32.49%

Eagleford

CRK Nov. -23.82% YTD -51.56%
CRZO Nov. -21.60% YTD -11.86%
MTDR Nov. -28.00% YTD -5.63%
PVA Nov. -34.90% YTD -45.60%
ROSE Nov. -16.69% YTD -38.76%
SN Nov. -28.41% YTD -53.94%
USEG Nov. -34.90% YTD -55.85%

Niobara

BBG Nov. -34.35% YTD -62.17%
BCEI Nov. -34.55% YTD -37.38%
PDCE Nov. -26.97% YTD -44.55%
SYRG Nov. -12.57% YTD +5.94%

Permian

AREX Nov. +6.70% YTD -49.64%
CPE Nov. -15.92% YTD -24.81%
CWEI Nov. -25.29% YTD -29.30%
CXO Nov. -8.92% YTD -11.81%
EGN Nov. -7.53% YTD -15.59%
EPE Nov. -25.87% YTD -40.87%
FANG Nov. -13.23% YTD +6.65%
LPI Nov. -39.91% YTD -62.26%
PE Nov. -26.21% YTD NA
RSPP Nov -5.96% YTD NA

[mauser96]

a couple of great links that will save hours of research on break even oil prices for various oil fields

Scotiabank: - Based upon an analysis of more than 50 oil plays across Canada and the United States, we estimate that ‘mid-cycle breakeven costs’ in the North Dakota Bakken (1.05 mb/d) are roughly US$69 per barrel and in the Permian Basin in Texas (1.63 mb/d) about US$68. While some producers have hedged forward at higher prices, if WTI oil remains around US$70 for more than six months, it appears likely that drilling activity will slow in more marginal areas of these plays as 2015 unfolds. Funding for independent oil producers will also tighten. However, the ‘liquids-rich’ Eagle Ford (1.45 mb/d) will be little impacted, with breakeven costs averaging only US$50.
That’s why we’ve had such an extreme sell-off in US oil & gas shares on Friday (see chart) and Canadian shares underperformed (see chart). If prices persist at current levels for months to come, the Saudis will achieve their objective of dealing a blow to North American oil production. Current expectations of the US outpacing Saudi Arabia as the number one oil producer (see chart) will be shelved for some time. And the only thing the US government could do at this point to support the domestic oil industry is to begin increasing the Strategic Petroleum Reserve.

Read more: http://soberlook.com/2014/11/at-current-prices-bakken-and-pe…

http://www.businessinsider.com/citi-breakeven-oil-production…

The Eagleford has 3 production areas, one dry gas, one wet gas, one oil. I like the latter. I got in on the early stages of this, bought some smaller companies, sold after a profit when the field became widely known. It has been so long ago that I have forgotten most of what I knew about individual companies. I would look for reserves only in the "oily "area, and whether the company e purchased leases in the last year or two… If they did they probably overpaid for them. I do remember EOG as a good candidate.

Unfortunately the Strategic Reserve has often been used as a political tool, rather than what it should be for, a reserve in case of a major war. And has often been filled with Saudi Oil. So a modest increase in size , using US oil at cheap prices seems a good idea to me. Not to support oil prices or oil companies but for security until other non hydrocarbon motive sources become available… And only at rock bottom cheap oil prices.

I don’t think lower prices will be a “death blow” to fracked oil in the US. The oil is still there, the technology will improve over time, and thus break even will gradually get lower. Rather than a death blow it will be suspended sentence.

$40/bbl oil will hurt the Saudis more than us. The country is controlled by a small population of provinces of princes, the middle class can’t rise in status. The fanatical Muslim leaders are bought off with bribes. The poor are bought off with lots of freebies. All this takes a lot of money. An Iranian style revolution is always a possibility. The gun powder is in place, all it needs is a lit fuse. How many kingdoms are left in the world, much less the Middle East? In the latter case only Jordan and Saudi Arabia.

[rjf53]

a couple of great links that will save hours of research on break even oil prices for various oil fields

Only if you want to increase the chance of losing money.

While it is true that you have three different sections it doesn’t follow that all companies in the oil section for example have equally good property.

nd whether the company e purchased leases in the last year or two… If they did they probably overpaid for them.

It doesn’t matter a bit at this point what they paid for something (what’s done is done), it’s the debt they carry along with other metrics that matter now.

$40/bbl oil will hurt the Saudis more than us.

Maybe but that won’t be the case in TX, or ND, or…

[mauser96]

from a recent Maudlin Outside the Box sorry no link it came as an e-mail.

In the current cycle, though, prices will have to decline much further from current levels to curb new investment and discourage US production of shale oil. Most of the growth in shale is in lower-cost plays (Eagle Ford, Permian and the Bakken) and the breakeven point has been falling as productivity per well is improving and companies have refined their fracking techniques. The median North American shale development needs an oil price of $57 to breakeven today, compared to $70 last year according to research firm IHS

It is hard to believe that technology has improved that much in the last year. Misprint? Error? But the point is valid, fracking technology is continuing to improve rapidly, oil companies in a declining price environment will select the most productive areas to drill, especially when crude prices are low.

While each company has a different cost structure for most it is not dissimilar by a lot in a given part of a given stratigraphic field like Bakken or Eagle Ford. Often researching will give a more exact figure but it is hard to trust even company figures. Those who didn’t buy a lot of expensive leases now have the cash to buy leases a lot cheaper.

Re Profire --the declining oil price can’t be good. OTOH if the payback is quick drillers might use their money to improve returns on existing wells or on wells they need to drill to hold leases rather than drilling new wells. Who knows, it makes the risk higher therefore the price should decline to reflect that.