Break-even prices. This is
from a WSJ article from late 2018. One would assume the numbers were based on data from 2Q18 and 3Q18. They wouldn't have the data from 4Q18 although I doubt there would have been much change. [
See comments.]
From the linked article:
Estimates by consulting firm R.S. Energy Group peg break-evens excluding
land costs and overhead at about $37 for the Permian Basin of West
Texas and New Mexico, $42 for the Eagle Ford in South Texas and $47 for
the Bakken in North Dakota.
But companies require much higher oil prices in order to come out ahead
if more of those necessary expenses are taken into account, the
consulting firm’s data show. All-inclusive break-evens are about $51 in
the Permian, $57 in the Eagle Ford and $64 in the Bakken, according to
R.S. Energy.
1. Cost of the land is irrelevant after it's bought. It's a sunk cost. So, for players developing existing land, it's irrelevant. Only applies to new entrants. And the vast majority of drilling is done by existing players, not entrants.
ReplyDelete2. Suspect some of the overhead and the like is sunk cost also. But don't know without more detail. The key question is if you don't drill the well, can you also avoid the overhead cost? If you still have to pay it, it's sunk also.
3. Never understand these articles that give a breakeven for an entire play. Sweet spot or not. Spacing not specified. Etc. This is just way, way too long to be seeing the exact same misconception in these pop business stories.
Wow, wow, wow. Seriously, I agree with you 1,000% but I was afraid to provide my usual comments to the linked article. I figured I would get too much pushback. But you are so correct. You point out something obvious: if the land is bought (sunk cost) do you drill or not drill because if includes the cost of the land, it won't be an economic well?
ReplyDeleteSo many other problems with the article.
As long as we're on the subject, something else needs to be pointed out. I can't speak for the Permian, but the Bakken is now in a "manufacturing stage." It's different than it was at the height of the boom; I'm not sure Wall Street analysts understand that.
Thank you so much for taking time to comment. Much more could be written but I will hold off for now.