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Permalink Reply by Dion Warr, CPL on October 17, 2019 at 5:34

Skip:

I think that we've already started to see it in the shale plays and it certainly followed with the first-generation chalk wells.  Not to borrow too heavily from Rusty Braziel (who had a great column on the current outside-of-energy investor financial assessment of the current state of the industry and its recent past), but as lower commodity prices forced a snap to reality (or gut check) as to financial health, dwindling free-cash flows and burgeoning debt, the majors and major independents have employed both cost-cutting and high-grading of assets in order to right their economic ships.

The process nearly always results in divestments of higher-cost and lesser-producing properties, which then nearly always end up in the hands of smaller shops which can either "make due" with lower cash flows as their LOEs and profit margins can be more tolerant than that of the larger E&Ps, or otherwise retool the assets through stimulations, treatments and/or recompletions (which the larger companies cannot do efficiently on a well-to-well basis in most cases).  Although these types of operations are a large expense, mid-size and smaller E&Ps make a living on this on a routine basis (I'm reminded of wrestling's Bobby Heenan use of the term "ham-and-eggers") - they're not high-profile or very exciting, but the good outfits can always turn a profit on the leavings of the big shops.  The only change I see is that the mid-level independent tends to be a bit better capitalized that can take on the Tier I - Tier II and mid-life shale wells, as the unconventional process is more capital intensive, both collectively and on a per-well basis.

With respect to the AC, we already see that the longer-producing first generation wells have been passed onto the tertiary operators.  These operators can range from being "sketchy" as to maintaining a lease with marginal flows to highly-respected shops which specialize in milking end-of-life wells nearly dry before the rake of minimal LOEs obligate final plugging.  The long flat tails of unconventional shale wells will naturally fit this model, as we have seen in the AC.

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Permalink Reply by Skip Peel - Mineral Consultant on October 17, 2019 at 6:26

Thanks, Dion.  I don't think we will see many unconventional units go to smaller operators until all available spacing has been utilized and the last wells are five or more years old.  I haven't seen any news on re-fracs lately but the last I recall were around $4M, about half or a less than a new well.  For smaller companies to make re-fracs the focus of  their business model I suspect that cost has got to come down a good bit.  I do think that savvy operators interested in secondary recovery will look hard at the original frac design and production history.  A lot of early wells were completed with frac designs that are now viewed as a good deal less than optimum.  There could be opportunity for those that can figure out the best candidates for re-fracs.  At some point idled frac equipment might be cheap enough for a smaller operator to own and utilize their own to drive down that cost.

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