It Don’t Come Easy – Low Crude Prices, Producer Breakevens And Drilling Economics – Part 3

On Friday (January 23, 2015) West Texas Intermediate (WTI) futures prices closed under $46/Bbl for the second time this year. RBN’s analysis of producer internal rates of return (IRRs) for typical oil wells indicates that Bakken IRRs have fallen from 39% in the fall of 2014 to just 1% today. IRRs for typical Permian wells are down to 3% and typical Eagle Ford wells are at breakeven. Everything is underwater or close to it except for the sweet spot wells with higher production. Today we present highlights from RBN’s IRR and breakeven analysis – published in full today in our latest Drill Down Report.

In Episode 1 of this series we reviewed recent price carnage in crude, natural gas and natural gas liquids (NGL) markets that have crushed the IRRs producers enjoyed in the summer of 2014 and resulted in much speculation about the impact on current and future production. We noted that existing wells currently flowing will continue to produce – there is no value to shutting in output because of falling prices.  That is because even at today’s prices, the per-unit revenues of existing wells are significantly above operating costs. In fact, production is likely to increase in the near term. Our expectations of production increases in 2015 are reinforced by recent investor presentations (see Rig Cuts Deep Output High). In Episode 2 we ran through the inputs and model assumptions behind our IRR and breakeven sensitivity analysis using RBN’s Production Economics model. Coming up with representative input variables for the model is as much art as science but the main goal is to understand how the numbers relate to each other.  Most analysts make you guess what the input variables are, so you really don’t know what you are looking at.  We lay it out for you so you can make your own judgments about whether or not our data is truly representative. In this final episode in the series we present highlights of our analysis results. The full results are available exclusively to RBN Backstage Pass subscribers in our latest Drill Down report (for more details see the Ad below).

The primary goal of our analysis was to identify typical IRRs in different crude oil and natural gas price scenarios for major shale plays across the U.S. at various crude and natural gas price levels. We analyzed data from a range of wells for each of the basins in Table #1 and aggregated the results to provide values for representative wells in oil, liquids (NGLs) and natural gas categories.  From the set of representative wells for each play we then extracted a super set of “sweet spot” wells having the highest IP rates that produce the highest IRRs. We used these wells to identify sweet spot well characteristics.