Independents Have Positive Cash Flow For First Time Since 2008. Does It Matter? August 29, 2014

Updates

Later, 8:49 a.m. CDT: from a reader -- Halcon put 18 wells online in 2nd quarter (all Fort Berthold)... all of them exceeded the 801K EUR type curve ... all of their wells now consistently IP over 2,000 with the recent wells all IP's over 2500 .... staggering....
 

Original Post

I don't know how closely readers follow this story, but when The Oil Drum was up and running, there were several common themes running through that site as well as across other sites as well. One of those common themes was "The Red Queen" and derivatives of "The Red Queen." One of the derivatives of this argument was that drilling the Bakken was so expensive that operators had to drill as fast as they could to maintain a cash flow to keep drilling. I always argued the "seed corn" analogy. (I always hated that phrase, "seed corn," but it certainly works in some cases, but I digress).

Now there's a report out from Reuters being reported over at Rigzone: free cash flow says little about shale.

The independent companies at the forefront of the U.S. shale boom will finally earn enough from selling oil and gas to cover their capital expenditures next year, for the first time since 2008.

Free cash flow, which measures operating cash flow minus capital spending, for the 25 leading independent oil and gas producers is expected to show a surplus of $2.4 billion in 2015, according to a consensus forecast in the Financial Times.

That compares with a shortfall of around $9 billion in 2013 and $32 billion in 2012 ("Shale oil and gas producers' finances lift growth hopes" FT, Aug 27).

During the years of negative free cash flow, independents relied on equity issues, borrowing and asset sales to sustain their drilling programmes.

That led some analysts to conclude the shale boom was unsustainable or even liken it to a Ponzi scheme, which will collapse when fresh capital inflows cease.

"It is not clear that the U.S. independents are profitable," Steven Kopits, managing director of Princeton Energy Advisers, wrote recently for Platts. "An industry can see a boom irrespective of profits or free cash flow if banks and investors are willing to underwrite the promises of future profits. The Internet bubble showed us that" ("Hamilton has it right on oil" July 30).

It's a great, great essay. But the concluding paragraph:

Positive free cash flow will make the shale industry look healthier than it has done in recent years, but in reality it says little about the long-term sustainability of the business model, any more than the losses did between 2009 and 2013. 

I agree completely. But all things being equal, I prefer "positive cash flow" over "negative cash flow" and discussions about "burn rates."

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EOG In The Permian

Disclaimer: this is not an investment site. Do not make any investment decisions based on anything you read here or think you may have read here. 

Over at Seeking Alpha, an update on EOG's prospects in perhaps the best field in America right now, the Permian. I don't think there's anything new in this article that regular readers don't already know. One data point:

One big difference that makes the Leonard play special is its production mix. The average Leonard well produces 50% crude, 26% NGLs, and 24% dry gas. EOG's other 100% ATROR areas tend to have a much heavier crude production mix, like 92% in the core Bakken or 78% in the Eagle Ford and Codell formations, yet the Leonard is just as profitable.

On its 134,000 net acres that are capable of accessing the Wolfcamp intervals, EOG expects to make only a 70% ATROR as the production mix is 31% oil, 33% NGLs, and 36% dry gas. That is still a very strong return, but isn't quite in the triple digit sweet spot. Luckily, EOG's Permian operations could receive a major boost from more NGL export capacity.