Conversational Rambling -- Shale Oil -- 2019 -- March 25, 2019

Not ready for prime time.

I don't know if this deserves a stand-alone post. This is poorly written, conversational in nature, but I'm posting it to remind me of the conversation I had this weekend. It will be interesting (at least for me) to come back to this conversation ten years from now, while looking out the window of my small one-room "apartment in a nursing home in north Texas.

Over the weekend I spoke to an individual who was the chief operations officer for a "mom-and-pop" Texas oil company some years ago. That company barely survived the Saudi deluge 2014 - 2016, and he moved on. He has not followed the oil industry particularly closely.

He reads much more than I do, but it is mostly "current events," a lot of surfing the net, not books. He was probably in his early 40s -- in round numbers, 40 years old. I am in my late 60s -- in round numbers 70 years old.

Some of his observations, our conversation.

He did not say anything that I had not heard before.

1. He suggested the oil sector today was much like the housing melt-down we had some years ago that caused the big crash. He reiterated the trope that no shale company has yet "made a penny." The shale oil companies were over-leveraged, lots of debt, and the banks must be terribly concerned. For argument's sake, I agreed, but noted that from owners and directors down to roughnecks and mineral owners, "everyone" was making money. The only two exceptions: investors and the banks. On that, we both agreed.

2. He talked about the shale sector as one entity; that it risked failing and taking investors and bankers along with it. Roughnecks, etc., would be laid off in huge numbers; the industry would implode. He referenced the US oil implosion of the 1980s. Whether it would affect the national economy (GDP) he was not sure. I pointed out that 'boom and bust" / wide swings in the oil sector were the norm in the oil industry. I said I doubted the entire sector would self-destruct. Some companies will fail/some will prosper. We saw this in 2014 - 2016 and in the big picture things seemed to work out relatively well, Perhaps very well for some. Really bad for others.

3. Back to #1. He noted that no shale oil companies had yet "made a dime." Or was it a "penny"? Whatever. I replied, "nor had Amazon." He jumped on that and he was correct. Two completely different situations. I pretty much dropped it, but he came back to Amazon. Two different situations.

4. Back to #1. He was unaware of the shift in corporate presentations of late: that the independent shale oil companies, like CLR, Whiting, etc., were now focused on free cash flow, reducing debt, etc.

5. Back to #1. He was unaware that companies like CLR now report that free cash flow from current operations will pay for CAPEX. To what degree that is true I don't know. I am eagerly looking forward to CLR's annual report for 2019. It's "show-me" time for CLR, WLL, others with regard to free cash flow.

6. He was unaware that in the Bakken there are about 2,000 wells that are offline for operational reasons and/or are drilled to depth and waiting to be completed. Two-thousand wells represents close to eighteen months, maybe two years, of new drilling in the Bakken. The numbers are even greater in the Permian.

7. I could tell he must be getting most of his information from the Art Berman School of Crude Oil Investing when he suggested that shale oil companies may not produce what they originally said they would produce. This follows that story some months ago that operators in the Permian were dialing back their EURs. The headlines, I pointed out, were very, very alarmist but when one read the articles, there wasn't much there. But it is the kind of story that will spook the banks.

8. Back to #7. I am absolutely convinced no one knows how much oil can be recovered from shale operations through primary recovery. I have no idea, but as a "wag," one can argue that with a conventional pool 50% of that OOIP will be recovered through primary production; the pool will deplete over time, but the depletion curve is not particularly steep. On the other hand, there seems to be no "agreed-upon" "wag" with regard to how much oil will come from shale oil through primary production. When the boom began in the Bakken, the "wag" was 1 - 3%. It quickly went to 8 - 12%. I thought I had linked it but can't find it now: with new completion strategies, if I read the article correctly, one operator suggested primary production could jump from 11% to 20% -- something like that. Don't quote me on that; I could be way off. The point is that I don't think anyone really knows how much shale oil can be recovered through primary recovery.

9. We do know that, unlike conventional oil, there is no smooth decline rate for shale oil. Mike Filloon has shown that in his graphs; the shale oil companies are not yet talking about that.

10. We talked about the huge CAPEX, long lead-times for conventional oil projects of the past (think Exxon offshore) versus the much smaller CAPEX, very short lead-times for shale. Exxon is finally getting the clue bug.

11. He was unaware of what Exxon and Chevron were doing in the Permian.

12. He was aware of (vaguely, I suppose) of IMO2020. Neither of us knew how that would play out. He was vaguely aware that "sour oil is out, sweet oil is in." That is great news for WTI but neither of us really knew how that would affect the Mideast. I didn't get into that, but I've made myself pretty clear regarding my thoughts about Saudi Arabia.

13. We are all watching different movies regarding the shale industry. I suggested that regulations/government policy will have a bigger effect on the shale industry than the other things we talked about. I was thinking of the "fracking bans" that threaten the industry, and the global warming arguments.

14. He saw "red flags" everywhere, again most of them planted by the ABSOCOI. I see the same "red flags," but am not concerned. I've seen the potential of shale; I'm really not that interested in the investment angle. The technology of shale production is what fascinates me. I would never, never recommend anyone invest in any oil company, shale or otherwise.

15. One could go on and on. I might come back to this. The point I'm trying to make is that I don't think anyone has any real idea what the US shale oil industry will look like ten years from now.

Disclaimer: I am inappropriately exuberant about the Bakken and the shale boom, in general. This is not an investment site. Do not make any investment or financial decisions based on what you read here or think you may have read here.