Oil At $30 Is No Problem For Some Cost-Cutting Bakken Operators -- August 12, 2015

For newbies, I am inappropriately exuberant about the Bakken. Do not make any investment or financial decisions based on what you read here or what you think you have read here.

A reader sent me a very, very interesting article. Bloomberg is reporting: oil at $30 is no problem for some cost-cutting Bakken operators.

“One of the explanations for why production hasn’t fallen off is that the cost has gone down so much,” David Hackett, president of Stillwater Associates LLC, an energy consulting firm in Irvine, California, said by phone. “The marginal cost to produce has shrunk pretty dramatically with the drop in prices. The efficient drillers are now able to take advantage.”

West Texas Intermediate crude for September delivery rose 22 cents to settle at $43.30 today. It fell $1.88 a barrel to $43.08 yesterday. In North Dakota, where producers have to offer discounts to account for extra transportation costs, the price of Bakken oil dropped to $30.58 yesterday, according to Royal Dutch Shell PLC.

I responded. These are my opinions only. In a long note like this, there will be factual and typographical errors. Some of my comments which appear to be facts, may in fact be wrong. If this is important to you, go to the source:

Thank you. I appreciate that article. For investors this is how I see it.

Let's take WLL, or Oasis, or NOG, or CLR.

Let's assume they are not bought out.

They only have to survive. Even if they only earn a penny, they stay in business -- paying their employees, drilling their wells, paying their expenses. Earning a penny every quarter, and they can go on indefinitely. Of course, the investors aren't going to like it, seeing no growth, but eventually oil is going to go back to something more reasonable.

Companies who survive should do very very, very well.

But it's even "better" than that. They can actually have some quarters of losing money if their credit facility (the banks loaning the money) continue to have faith in them. In the 2Q15 earnings call, both Oasis and CLR said they had barely tapped their credit facility. Oasis actually said they had developed their 2015 budget assuming $50 oil for the entire 2015 calendar year.

They can cut a lot of CAPEX if they have to. Anything to stay positive. They can cut CAPEX before they have to start selling assets. I haven't seen anyone in the Bakken announce any significant asset sales. (Fidelity/MDU announced their sale -- on again / off again / on again -- before the slump in prices.)

And if a Bakken operator goes bankrupt / out of business, the oil is still there for another entrepreneur or mature oil company.

But for Saudi Arabia, oil is their lifeblood. I don't know how they will do it, but something has to give. They can't keep giving their oil away for $60. Even if it costs them pennies to drill, the fact is they need a lot of $$$$/bbl to finance their entire way of life and their very survival.

Maybe I'm whistling past the graveyard, but all these articles about how low oil can go before companies can no longer take it, is sort of the reverse of the Peak Oil argument.

Everyone has their own world view, their own myth. My world view is that a) the Bakken is not going away; b) investors in the oil and gas sector with a very long horizon (ten years) will do just fine; and, c) the US is in uncharted territory with its glut of energy (wind, solar, natural gas, oil, nuclear, coal) compared to the rest of the world. We should be reveling in our good fortune -- made possibly for free market capitalism and roughnecks, geologists, and truckers -- and talk about the opportunities and not fret about low oil prices. [One almost has to laugh: one would think Americans would be cheering low oil prices. Whatever.]

I'm looking forward to a president and an administration who can navigate through this uncharted territory, this unprecedented limitless energy as far out as the eyes can see.

Again, thank you very much for the attached article.