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E&P Sector Implosion

Any thoughts on the recent sector implosion? Recently written up names such view available tags (/tags)
as GST, MHR, MCF, etc along with many names in the space are down 25% + in
the past 2-3 months. Any thoughts on the cause, duration, potential upside,
etc? Obvious causes could be the dollar rally, oil price decline, oil production
concerns ... Print

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bruno677
12/11/14
77
Re: Re: Shale economics & short run crude price
 76  

Siegfried
75 12/11/14
Shale economics & short run crude price

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Getting back to the gap between well-level IRRs based on short-run marginal cost per barrel vs. true marginal
economic cost per barrel – there are big implications from this discussion about how the next 6-18 months plays out,
and I’ve been trying to quantify this a bit – it would be great to be get some more input from people with a better
sense of industry cost structures on my assumptions.

Obviously there is a big variance between different plays and operators but most of the research I’ve looked at
suggests a barrel-weighted breakeven cost of ~$75 for US shale, and I think that probably is a reasonable guess for
what a rational long-term balance would look like- $75+ – the world needs US shale oil production, or at least the vast
majority of it.

But if you think we are on an unsustainable production trajectory against current demand (this is almost certainly a
yes for the immediate future), prices will need to stay below short-run costs long enough for production to come out -
and I think you can make a case that this is definitely below $60.

My best guess would be that there is maybe a 60/40 split between long-term economic costs and short-run costs
once you toss out things like exploration drilling, seismic costs, land/lease cost, G&A cost. etc. Obviously not every
G&A dollar gets cut but it seems reasonable to assume there is probably a $20-$30+ wedge between what most
shale E&Ps need to be truly long-term economic and what they can survive from for 6+ months operating in run-off
mode. Existing capital commitments for equipment and support services as well as lease expiries further skew these
incentives, and capex dollars will get focused on optimizing existing assets- ie you see the industry maximize
production efficiency at the worst possible time.

Hedges make this a lot worse – a lot of guys seem to be 50%+ hedged for 2015 at $80+; if you figure the industry is
half this well hedged its hard to be optimistic that we’ve bottomed and supply will balance from here. Most of the
commentary I’ve seen from managements announcing 2015 capex cuts still guides to increased or flat production,
and most of the industry-wide data I’ve seen suggests we’ll still get 300k+ incremental barrels in 2015 on the current
futures strip.

Managements are incentivized to drill and have a poor record of capital discipline; if the evidence of what happened
in shale gas is suggestive I think you have to believe that supply keeps pumping until the industry gets forcibly
starved of new capital by the markets, in which case you will probably see guys go broke who don’t deserve to – not
just the leverage freaks and the cowboy wildcatters - and maybe a big rebound on the other side. The market still
isn't sure what to make of this giant structural change in the cost curve.

I think the only way out of this, other than majors voluntarily cutting a lot of production and ceding share to shale, is if
you think there are enough unhedged, levered independents who will go broke in <6 mos at current prices that it
makes a dent in supply growth. I don't really see either case as being realistic?

Demand dynamics are obviously another story - I am very negative on China and think there is probably more
downside than upside to demand, but I think these conclusions probably still hold unless you are very optimistic
about demand, or maybe that Libya utterly collapses.

That said, what attracts me to the idea of bottom fishing shale is that with decline curves it won’t take very long for
production to shut off once the decision is taken out of CEOs’ hands, and the world needs the vast majority of this
supply... This might all be being a bit too clever by half but I don't think I'll start buying E&Ps until we see prices in
the $50s.

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ubber926
74 12/09/14
Pre.to

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bruno677
12/01/14
71
Re: Historic capitulations continue
 70  

bruno677
11/28/14
69
Re: Effect on Midstream Names
 68  

MSLM28
11/28/14
67
Re: Re: So are any e&amp;ps ripe for bankruptcy
 66  

tyler939
65 11/28/14
So are any e&ps ripe for bankruptcy

bruno677
11/28/14
64
Re: Re: Re: Re: Anyone have any bold calls?
 63  

bruno677
11/27/14
63
Re: Re: Re: Anyone have any bold calls?
 62  

bruno677
11/16/14
61
Re: Anyone have any bold calls?
 60  

utah1009
59 10/23/14
It's the cheapest major oil company by a wide marg

mack885
58 10/23/14
If you have the stomach, we like the equities of G

elehunter
57 10/23/14
Utah, care to give the elevator speech on YPF at t

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utah1009
56 10/23/14
YPF is the easiest call imho, though the path it t

HoneyBadger
55 10/23/14
We have been fans of GST...just raised a bunch of

coda516
54 10/23/14
On the subject of E&amp;Ps, here is my somewhat ri

Bi ns
53 10/23/14
Anyone want to divulge which E&amp;Ps are looking

elehunter
52 10/23/14
Anyone think the Saudi production cut is more that

Bi ns
51 10/17/14
According to these guys, if OPEC doesn't cut, Bren

snarfy
50 10/16/14
If Baker turns out to be correct (and I think they

gandalf
49 10/16/14
Baker Hughes on their call just indicated that the

snarfy
48 10/14/14
to sancho, rst of all, very few people have acre

bruno677
47 10/14/14
Interesting GS works on shale costs http://www.

bowd57
46 10/14/14
Hi, GideonMagnus -- In light of the recent

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GideonMagnus
45 10/14/14
Preferreds have just joined in on the carnage the

sancho
44 10/11/14
I'm a little perplexed by the all the references t

cuyler1903
43 10/09/14
SPO is a very smart group of guys with a great tra

Paincap
42 10/09/14
This is a follow up to Message #17 RE: getting a l

bruno677
41 10/08/14
Sugar As much as I hope it was the bottom, I th

sugar
40 10/08/14
Masive mid day reversal. This could be the bottom

bruno677
39 10/08/14
Bi ns I would look at puts in Bakken speci c

Bi ns
38 10/08/14
Bruno, lets say that scenario plays out, what woul

Bruno, lets say that scenario plays out, what would be the best shorts? By saying Bakken would be shut rst, is it fair to
say that you feel Bakken is the marginal producer (due to lower netbacks and higher costs). In that sense which Bakken
players would be most at risk? 
 
Also have you looked at the economics of some of the Canadian guys in Saskatchewan or Duvernay, where netbacks
could be even lower?

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bruno677
37 10/08/14
AAgold The shale declines the argument supporte

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aagold
36 10/08/14
Yes, I agree with this logic. Unless Saudi Arabia

bruno677
35 10/08/14
The pain continues. The question according to some

bruno677
34 10/08/14
Panther I don't know if Relational has an impac

sugar
33 10/07/14
Hbomb, how do you more than price in a highly stre

hbomb5
32 10/07/14
Has anybody done any more work on EXXI? Obviously

PantherHollow412
31 10/07/14
Bruno, I have heard this thesis multiple times and

bruno677
30 10/06/14
Also a lot of hedge fund centric E&amp;P names are

bruno677
29 10/06/14
HoneBadger I had done one activist investmet wi

HoneyBadger
28 10/06/14
This space is ripe for activism. Activists tend to

bruno677
27 10/06/14
Panther My fear with smaller independents is th

PantherHollow412
26 10/06/14
The trading action has been accelerating to the do

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bruno677
25 10/06/14
Honeybadger I agree it is a pain trade from hel

HoneyBadger
24 10/06/14
Bruno/Gandalf I would have agreed its about short

bruno677
23 10/06/14
Gandalf, I agree its all about short term oil p

gandalf
22 10/06/14
Agree the independents with a growth multiple coul

bruno677
21 10/03/14
Holland in his post on the EOX thread raises two i

surf1680
20 10/03/14
Does anybody follow Mike Rose up in Canada. Right

PantherHollow412
19 10/03/14
REXX - Smid cap Marcellus Utica player, lots of st

bruno677
18 10/03/14
PatherHollow great idea E&amp;P APC&amp; APA

PantherHollow412
17 10/03/14
Let's get a list going of interesting situations t

bruno677
16 10/03/14
Great info Gandalf Shale oil production needs a

gandalf
15 10/03/14
I grew up in TX and have been following/investing

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bruno677
14 10/02/14
Also as a side note a lot of generalist who own en

bruno677
13 10/02/14
It amazing when you look at where future pricing i

HoneyBadger
12 10/02/14
de nitely getting ridiculous. I am tired of posti

bruno677
11 10/02/14
Slim, Liquidity for independent E&amp;P space h

snarfy
10 10/02/14
CIE and ROSE are crazy cheap. I'm just going to sa

slim
9 10/02/14
As long as you remain con dent in your analysis,

bruno677
8 10/02/14
At least the free fall ended today. XOP closed dow

mack885
7 10/02/14
RICE?

sugar
6 10/02/14
One other thing I'll point out. Its similar to 201

mack885
5 10/02/14
Sugar put it best. It feels like 2008 but only for

bruno677
4 10/02/14
Down another 3 plus percent across the board - mor

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bruno677
3 10/01/14
There is a avor of 2008 in that 4% daily drops i

sugar
2 10/01/14
I agree in terms of long term oil prices. But its

bruno677
1 10/01/14
Interesting thread - I was about to start one on

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