Shale Oil Myths - "US Production Is Struggling To Grow" -- Richard Zeits -- December 9, 2019

Before reading the post, some Mark Papa posts from the past:

• where is EOG headed? September 9, 2012
• US shale frackers eye world conquest, August 23, 2017
• what's Papa doing now? Buying Permian acreage for $11,000 / acre, November 28, 2016

The Post

Great article over at SeekingAlpha submitted by Richard Zeits. (If the link is broken, archived here.)

• claims of stagnating U.S. production have become popular recently but are often vastly exaggerated
• catch-up can be around the corner: growth pace during the second half of this year could significantly exceed 1 MMb/d in annualized terms
• longer term, U.S. production may face greater constraints from low-cost global competition as opposed to geological limitations

The article begins:

In this note, we offer for debate one of the most popular recent controversies: are the current commodity prices sufficient to support strong U.S. oil production growth in 2018?

We discuss some of the recent myths surrounding this issue and the reality the way we see it.

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Remarks From Mark Papa, Transcript, November 12, 2017

Link here.

Now, I will provide some thoughts regarding the oil macro picture and relate them to the Centennial’s strategy. Many of the macro comments are simply a repeat of the comments I made on the earnings calls three months ago. Events have moved even faster than I predicted and reinforce my conclusions.

Oil markets have recently responded to the combination of high global demand, rapidly reducing crude and product inventories and tepid U.S. production growth. The last of these items is a most controversial and I would elaborate a bit on the logic regarding the tepid U.S. growth.

Based on monthly EIA numbers, U.S. oil production has been essentially flat for the past seven months and I expect 2017 year-over-year production growth to be 330,000 barrels per day, much less than early year consensus estimates of 700,000 to 800,000 barrels per day, even though the oil rig count is currently 900, an increase of 500 rigs compared to May 19, 2016.

Many people will describe the reason for this tepid growth to be cash flow or service company limitations, but I think it’s lack of remaining Tier-1 geologic quality drilling locations in two of the three major oil shale plays, the Eagle Ford and Bakken. Even in a constructive oil price environment, I expect that 2018, total U.S. oil growth will be considerably less than the 1.2 million to 1.4 million barrels per day that many people are predicting.

Centennial’s strategic response to this tightening global oil supply demand picture is as follows: first, we are remaining unhedged regarding oil, we may hedge some gas and may add to our gas FT commitments to ensure that our products move out of the Permian Basin, but we like the supply and demand picture on oil and with our low debt see no reason to hedge oil.

Second, we will continue on a path towards 60,000 barrels of oil a day in 2020, which is a highest four year oil growth CAGR of any E&P. And third, we will look for tactical means to cautiously term up service company agreements.

In closing, there are four things we like you take away from this call. First, we began to increase our 2017 production target, albeit slightly this time without increasing CapEx.

Second, we began to reduce our full year 2017 DD&A estimate. This represents the financial effect of the top quality technical team we now have in place as exhibited by the good wells we noted in our press release and on this call.

Third, we are exhibiting a very high multi-year oil growth rate, while maintaining negligible debt with an expected year-end debt to cap below 10%.

And fourth, we expect to begin to generate reasonable GAAP ROEs and ROCEs beginning at oil prices just about where WTI is today.