Great post as always Dan.It frustrates the hell out of me that...

Great post as always Dan.

It frustrates the hell out of me that the market paints the entire shale industry with the same brush.

Exhibit A:

Independent/ Small O&G Co. buys up Tier 2 / 3 land on the fringes of the hot spots and starts drilling when oil and gas prices are high. While the oil and gas prices are high, they turn a profit and they keep expanding – often over extending themselves.

Few years later, oil and gas prices plummet due to over-supply as the high prices encouraged other small O&G Co’s to jump onto the bandwagon as well as majors ramping up production (thus creating the oversupply). Oil and gas prices fall below their break-even prices and they start losing money. They keep borrowing and raising capital trying to wait out the downturn. Down turn continues for extended period, investors flee due to poor returns, banks turnoff the taps as they can’t see an end in sight - company goes under.

Oil majors move in, pick up the assets, increase their position and continue the consolidation.

Exhibit B:

Independent company buys up Tier 1 land right in the heart of the hot spots. Does not undertake any drilling as it is high risk – leaves that to a 3^rd party and books reserves instead. Has low overheads, is disciplined with spending, takes things slowly and ensures they do not over-extend. Creates a portfolio of small diverse WI’s to create income and harvest drilling and completion info in the area. (The information collected is valuable as it improves the value of the land they own ie: Well flow data, geological info,drilling and completion techniques etc is valuable to a potential buyer).Company establishes high quality reserves which it knows it can divest if required to continue operations.

Few years later, oil and gas prices plummet due to over-supply. As they have been disciplined with their spending, have not over-extended themselves and have demonstrated profitability due to having Tier 1 assets with low break-even &high recovery rates, they are able to utilise their assets to leverage borrowings (if required at the time). They continue their operations whilst waiting out the downturn and capitalise by cherry picking more acreage on the cheap. Oil & gas prices increase, company reserves and land value increase accordingly. Company strategically divests and continues with expansion.

Due to the large number of players playing in the exhibit A bracket and the subsequent bankruptcies of these companies, it is easy to see why investors are wary of the sector and often won’t give it a second look.

I guess the point I am trying to make here is that not all shale players are created equal.

Despite ups and downs in the industry, shale is here to stay. It is simply far easier for majors to turn the taps on and off to coincide with the market with onshore projects vs offshore.