December 4, 2018 Read More →

Low oil prices to test U.S. fracking companies

The Wall Street Journal ($):

The rapid decline of U.S. oil prices will test the claim of fracking companies that they can now prosper at $50 a barrel or less, a price level they have found challenging in the past.

For years, the companies behind the U.S. oil and gas boom, including Noble Energy Inc. and Whiting Petroleum Corp., have promised shareholders that they have thousands of prospective wells that they can drill profitably even at $40 a barrel. Some have even said they can generate returns on investment of 30%.

But most shale drillers haven’t made much, if any, money at those prices. From 2012 to 2017, the 30 biggest shale producers lost more than $50 billion. Last year, when oil prices averaged about $50 a barrel, the group as a whole was barely in the black, with profits of about $1.7 billion, or roughly 1.3% of revenue, according to FactSet.

The disconnect between the figures cited by companies and their corporate returns lies in the widespread use of a metric called a break-even, often defined as the selling price frackers say they need to generate a small profit on individual wells or projects. While the figure can be quite low for some companies in certain hot spots, it can be a misleading measure of their overall profitability in periods of lower prices.

For one, break-evens generally exclude such key costs as land, overhead and even at times transportation. Companies also frequently tout the low break-even price point of a portion of their holdings, without citing the higher price for crude needed to profitably exploit the rest, or adjusting for the inflated cost for drilling contractors and other services that come with rising oil prices.

Estimates by consulting firm R.S. Energy Group peg break-evens excluding land costs and overhead at about $37 for the Permian Basin of West Texas and New Mexico, $42 for the Eagle Ford in South Texas and $47 for the Bakken in North Dakota. But companies require much higher oil prices in order to come out ahead if more of those necessary expenses are taken into account, the consulting firm’s data show. All-inclusive break-evens are about $51 in the Permian, $57 in the Eagle Ford and $64 in the Bakken, according to R.S. Energy.

More ($): Big fracking profits at $50 a barrel? Don’t bet on it

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