Filloon: Permian Update -- August 20, 2017

Disclaimer: same as usual.

From Mike Filloon at SeekingAlpha, summary:

• recent Delaware core completions have raised the bar with respect to production per foot
• the Midland Basin is excellent, but the Delaware seems to have better geology and the best source rock outperforms
• the most recent results have been better than expectations, but the question seems to focus on repeatability
• operator hedging in the Permian is being done at lower oil prices, which seems to show operators can hold on at today's prices.  These hedges will continue to decrease the chances of a break out in oil prices
• Even with payback times decreasing in the Delaware, we expect a test of 52-week highs in the USO this year

More:

Enhanced completions continue to better unconventional well economics in the United States. While there are considerable differences in the bullish and bearish narratives for oil prices, production numbers are concrete. 

We continue to see operators increase production, and many have been able to decrease proppant volumes. Either we have hit a peak in production per foot or operators do not need to pack as much sand in frac's. Enhanced completions are the new normal.

Operators are moving to plug and perf with cement liners. Ceramic proppant is being pushed out given the expense.  It was once thought frac sand could only be used in more shallow plays. Worries that sand would crush out and stop production, are not a concern with newer designs. We have covered enhanced completions in several plays. 

Summary:

In summary, we think economics from core plays will continue to provide a ceiling for the USO and oil prices in general. There is still considerable inventory in very good geology.

This means we will see operators continue to hedge at $50/bbl. We expect this oil price ceiling will slowly increase in the coming months, as Permian operators get hedge positions in for 2017 and 2018.

When oil reaches $54 to $55, other plays like the Bakken will begin to increase hedging and provide a new ceiling. It will take an additional, unforeseen catalyst to push oil to $60.

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From Sophia's Art Studio

"Leprechaun Behind a Tree"

Sophia, age 3.

August 20, 2017