E Bakken Update: Economics Improve As Costs Decrease And Enhanced Completions Improve Production

Before the price of oil fell, most thought the average shale focused E&P would need $80/bbl WTI to turn a profit.Now that oil is hovering around $50/bbl, and the US Oil ETF (USO) is trading below $11/share, those estimates are much lower.Estimates are deceiving, as analysts were averaging all acreage.Since most operators are focusing on core leasehold, estimates should do the same.Some acreage still needs oil at $80/bbl, but these fringe areas are not economic.Many fringe players have declared bankruptcy, and this trend is likely to continue.Some analysts have changed estimates to $60/bbl, but some operators are adding rigs and increasing production.It is possible some operators are thinking ahead.It can take months before a rig is put to work and an operator sees a location turned to sales.

There is a relatively large difference in operator break evens.Keep in mind, breakeven is not good enough.Operators need to produce returns. Each operator is different based on acreage returns.Production isn’t the only variable.The percentage of resource is important, and many operators are focusing on combo plays.Many of the best plays still produce a decent percentage of natural gas.The main reason is well pressure.If an interval produces about 20% to 35% natural gas, the well will produces larger IP rates.This is measured over the first 30, 60 and 90 days.This means plays that produce natural gas and crude will maintain well pressures better over a period of time.Newer well designs seem to provide better results and a flatter decline curve.This means production holds up better and one would see production continue at higher rates.  Essentially, better geology and well design are really improving production numbers.Operators have followed EOG Resources’ (EOG) lead, and focused on breaking up the source rock better around the well bore.This means the rock is cracked or broken up better.The well bore has more contact with the interval, and hence more crude, natural gas and NGLs are produced in a shorter period of time. 

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(Source: Whiting)

The above picture provides a good visual as to how newer well designs are able to break up shale better for operators like Whiting (WLL).By having the ability to break up rock in more contact points helps to produce more resource per foot.It improves well economics by increasing revenues.When more fracs produce, more fluids and proppant are needed per well.This benefits fluids producers like Flotek (FTK) and Newpark (NR).It also provides increased demand for proppant which helps frac sand producers like US Silica (SLCA), Hi-Crush (HCLP), Fairmount (FMSA), and Emerge (EMES).The greater the rock void created, the larger the volumes of proppant and fluids are needed.I have done a great deal of work on Mega-Fracs and the improved production seen.The returns have improved, but these wells also have higher costs.Operators have not moved solely to Mega-Frac style wells, but as we move forward we are seeing it done more.The majority of wells are using more oil related commodities; as perf clusters are added per stage.This will continue, and operators will find whatever the most appropriate recipe is needed.

Production is important, but keeping costs down are as well.  Operating costs are taken from each barrel, so revenues are not the key.If a location produces record production for an area, it would matter little if the operator lost money doing it.With oil prices at $50/bbl or less each dollar is important.Operators have done an excellent job of cutting costs as oil prices fell.This has been done through improved productivity and by negotiating lower costs from oil service companies.Operating costs are removed from revenues, when figuring out how quickly a well reaches payback. 

The differences in operator economics are significant.In the new oil price environment, only the best will survive.Those that do, will grow through consolidation.These companies should continue to do well for years to come, and could be good long term investments.I am covering several operators to show the improvements seen over the past couple of years.These improvements are the reason why operators need a lower oil price to drive returns.