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Cowboyistan and the Red Queen

  1. cmonaussie

    5,792 Posts.
    Bolding is mine.

    Many E&P have reported on Q4. Several important (to me anyway) companies left to report are DVN (Feb 18), EOG (Feb 19), CHK (Feb 25), CLR (Feb 25) and CXO (Feb 26). Last week PXD and APA reported with some really interesting commentary. IMO best to pay attention to these CEO of the major shale players than the analysts per se.

    "The Bakken, Eagle Ford and "new" Permian Basin make up what Continental Resources Inc. executives like to call "Cowboyistan." It's the seventh-largest petroleum liquids producing area in the world and has made the United States a player in the global oil game, lending more insight into where the global oil market is going, Continental COO Jack Stark said in Houston Wednesday."


    Credit to Jack Stark for coming up with a catchy name. Now in general Cowboys will either wear a "black" hat (signifying the bad guy) or a white hat (signifying the good guy) - although I believe (Marshall) Wyatt Earp wore a black hat and he was one of the good guys.

    The Red Queen is well known in the context of shale producers - she is the Queen of the "decline curve"

    "The reference in the title to the Red Queen from “Through the Looking-Glass” by the English author Charles Lutwidge Dodgson (perhaps better known as his pseudonym Lewis Carrol) who was also a mathematician and logician, is deliberate to create associations with the Red Queen’s statement "It takes all the running you can do, to keep in the same place"".


    Note - I don't necessarily agree much of with article above, especially as now the data & numbers (oops them again) are stale by any standard (Sep 2012) and that in the shale technology game is a long long time, but the concept of the Red Queen applies.

    Now to my musings post Rd 1 of reporting. The Cowboys who wear the Black Hats are those E&P companies that are overleveraged (read weak balance sheet e.g. HK) and they will struggle to keep the Red Queen away and the Cowboys with the White Hats are those with strong balance sheets & plenty of liquidity and the brains/guts to develop their properties within parameters that keep the Red Queen at bay (away/at bay : a poet yet I don't know it).

    John Christmann (new CEO at Apache - APA) was pretty blunt when discussing APA's approx 70% Capex reduction f0r 2105 and reduction in working rigs From 80+ to 17!). The transcipt is worth reading.

    "In response to the rapid drop in oil price, we have purposely taken quick and decisive action to reduce our drilling activity, well costs, G&A and lease operating expenses."

    "We cannot predict nor control the length or depth of this oil price correction, or the timing and extent of the rebound. We have therefore acted quickly and decisively regarding the things we can control. Our activity levels and cost structure."

    "Importantly, once we achieve the full benefit of lower well costs, our returns will be competitive at $50 per barrel of oil to those represented in our November North American update at $80 per barrel. The key difference is that we will simply have less cash flow to work with and will accordingly drill fewer wells"

    "The slowdown provides an opportunity for us to be come a more efficient company through focused initiatives such as realigning our North American incentive program to reward continuous improvement and cost discipline, creating medium and longer term field development plans and high grading and improving our drilling inventory, rationalizing and consolidating our acreage position, leveraging our surface operations infrastructure and scale adding key acreage while there is less competition and at lower prices, and reducing our North American base production decline."

    "... 2015 capital budget and production outlook, based on the midpoint of our capital guidance range we anticipate spending a total of $3.8 billion in 2015, which excludes potential lease hold purchases or acquisitions. Compared to 2014, this represents a 60% decrease in our capital spending..."

    "The Permian was once again our biggest growth driver and we exited the year with record production. We ran 42 rigs during the fourth quarter ..... In 2015, we plan to average 10 to 12 rigs in the Permian"

    "In the Eagle Ford, our rig count peaked at 12 in December and by end of this month will be down to four. By mid-year we plan to have one to two rigs working in the Eagle Ford"

    The Q&A session on the call was very enlightening. Absolutely adamant about not touching the balance sheet to drill - its all about cash flow and that means less wells!

    PXD was quite similar and they were willing to just dip into the balance sheet after cleverly raising capital in early Nov (ahead of OPEC Thanksgiving day meeting that caused the oil price rout) of approx $1B in an offering of 5,750,000 shares. That strengthened their balance sheet tremendously.

    Like APA, PXD cut their 2015 budget deeply - by 50% - and with infrastructure capex deferrals and less wells can pretty much only need to tap about $100M.

    PXD transcript is here:

    CEO Scott Sheffield
    "...Each company is going to have a lot lower margins, they’re going to have a lot lower growth rate, so you’re not going to get the same growth rate at $90 versus $70. At this point in time we’re running out 10 year models and it all depends on the oil price long term and so I could not even speculate, but I do know that we’re set up to grow significantly in ’16, ’17, and ’18 continually based on the strip price as we see it today with a 20% plus reduction.

    If the oil prices stay lower, we’ll probably see more than 20% cost reduction. It all depends on what happens going into ’16, ’17, and ’18. In my opinion, the bigger picture is that the US has been growing a million barrels per day a year. The world on the demand side, most people agree, will be adding 1.2 million barrels a day. The Saudi’s want to find a price, a long term price, that will keep US growth somewhere down between 300,000 and 500,000 barrels a day until demand significantly picks up and so long term I feel like we’re in a $60 to $80 price world instead of an $80 to $100 price world. Once this thing settles out we’re probably going to be in the $60 to $80 for a while until we see conflicts in the Middle East, or see demand pick up significantly"

    The PXD CFO on oil pricing
    "The bigger picture is that we have to – nobody knows what the price of oil is going to be in ’16, ’17, ’18, and ’19 and we have to wait and see what happens when things bottom out this year whether it’s $40 or whether it is $44 a few weeks ago, and we’re hedged so we’re not too concern about how low it will go. Personally, I’d rather it go lower and just recorrect itself and have the supply side turn down. The world is still very, very tight, there’s only two million barrels a day excess capacity in the world. That’s going to be used up in the next two years easily. "

    Both these companies are focusing on cost and by reducing those costs (D&C and company) their cash margins improve. As D&C costs come down and technology improvements get applied the EUR is rising, the IRR is rising and EBITDAX is improving.

    Now SSN, like APA and PXD are going into 2015 "Hot" - as in they have a lot of well completions coming online in Q1 which will "goose" production. Given both PXD and APA are effectively guiding "flat" on a YoY basis, that can only mean the 2nd production will be REAL PRODUCTION declines. Given Q1 & Q2 are likely to still grow I believe that the pressure will remain on oil pricing - so I agree with the PXD CFO - a recorrection to the lows (which in Dec and Jan occured mid month - so if on trend we may be in for a drop this week - who knows) will really enforce the Saudi desire. But with the oil majors deferring large Capex projects that take a long time for $invested to show up as a $barrel I'd say the industry will overshoot the production cutbacks and supply will be less than demand. But for that - we have shale E&P where $invested can show up as a $barrel oil in less than 3 months.

    Now I haven't gotten any response yet from my EBITDAX reconciliation question to SSN mgmt (but I hope to). If SSN raises production enough in Q1 and the oil price behaves it may not trip the covenant again. But here is the caution flag - Q4 had avg realized price of $62/Boe. My projections for Q1 (on a WTI $50 avg) make it too close to call - guessing they have an additional $250K of cash flow from the increased production.

    Does SSN have a white hat or a black hat? (or maybe a rabbit in its tan hat). Across the US the 2015 Capex cuts have been deep. And we seen the same from Shell, Total and many more in Europe and Canada.

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