US Shale Drillers Are Ready to Weather Any Downturn, Kimmeridge Says
US Shale Drillers Are Ready to Weather Any Downturn, Kimmeridge Says
Gerson Freitas Jr. and David Wethe, Bloomberg News Mar 17, 2023
(Bloomberg) -- US shale explorers are well prepared to manage a potential credit crisis after piling up cash and paying down most of their debt, according to private equity firm Kimmeridge Energy Management Co.
“I don’t think the upstream business has ever been in better position for a downturn than it is today,” Kimmeridge managing partner Ben Dell said in an interview. “We’re heading to being essentially debt-free as an industry.”
The shale industry has historically been heavily reliant on loans secured by their oil and gas assets, stoking concern that the turmoil engulfing the banking sector will cut off drillers’ access to credit. Fears of a recession, meanwhile, are weighing on fuel prices and threatened to erode profits after a two-year bonanza.
But shale explorers have made a strategic shift in recent years from reckless spending and unchecked output growth to strict capital discipline. The new business model could help shield the industry from the fallout of a credit crunch.
“When oil went to $130, we were kind of impressed by the level of discipline the companies held,” Dell said. “As you’ve seen commodities come down, we were pretty impressed by the reaction from operators in terms of being rational and dropping rigs and focusing on profitability.”
Kimmeridge holds stakes in publicly traded oil and gas producers including Civitas Resources Inc. and Chesapeake Energy Corp. It’s also the owner of Titan Exploration LLC in Wyoming.
Dell, who was an exploration geologist and geophysicist at BP Plc before founding Kimmeridge in 2012, expects oil from US shale to grow by less than 250,000 barrels this year. That’s down by about 100,000 barrels from the level he would have predicted a few months ago, he said.
Record costs from a shortage of labor and supply-chain snarls are contributing to a slowdown in production growth from the US shale patch. Explorers are also running out of top—tier acreage. In recent weeks, some of the biggest US oil companies have reaffirmed plans to keep growth low this year.
“If you grow, you accelerate your inventory problem,” Dell said. “Until capital comes into the space, until multiples expand, there’s actually no real incentive to grow.”
©2023 Bloomberg L.P.
Views: 545
Replies to This Discussion
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Permalink Reply by Hale Yayuh on
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"If you grow, you accelerate your inventory problem"... what do you think he means by that? Drilling requirements to HBP and maybe continuous development requirements or what? If a company were to grow by acquiring another company that has all HBP acreage, an HBP concern is moot.
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Permalink Reply by Skip Peel - Mineral Consultant on
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That quote relates to this quote, "Explorers are also running out of top—tier acreage." It is becoming common for oil and gas articles to mention that numerous operating companies, especially in the Permian Basin, have drilled much of their Tier One acreage. Not all of the basin is Tier One and as operators drill their lesser tiered acreage, the wells are not as productive. You'll also read numerous comments about the wells becoming more "gasy". Less oil produced, more natural gas.
In other words, the faster you drill your Tier One acreage, the less productive your leasehold becomes. Your running through your Tier One acreage leaving the less productive acreage as a larger and larger percentage of your total leasehold.
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Good answer!
The article, in part, makes me think of field drilling life. Say one thinks the HA might have 35 years of field development. If there are extended downturns, and lack of drilling due to lesser capital available, the field life is extended. Which can be a negative for mineral owners. Especially dependent on their age.
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Permalink Reply by Skip Peel - Mineral Consultant on
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I haven't read anything regarding decreasing tiered acreage in the Haynesville Shale fairway. There are definitely variations in production by area across the fairway but the advent of Cross Unit Lateral wells (HC) and high intensity fracks have seemed to make the differences less of a economic problem for operators. Another difference compared to the Permian is that the drilling history of the Permian has been one of down spacing. That's decreasing the distance between wells which can create problems. Haynesville operators have gone in the opposite direction. They are up spacing. In the beginning, operators were drilling 8 wells per standard section. With the advent of HC wells and bigger frac cylinders, operators went to six. Over the last year or so I have reviewed alternate well applications that call for four new wells equaling five total to drain a standard section. This makes it cheaper for an operator to produce an mcf and is good up to the point where there is a reduction in the percentage of recoverable reserves being produced. That would constitute wasting the resource.
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Permalink Reply by Skip Peel - Mineral Consultant on
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In addition to tiers of Haynesville acreage, there is the ever meandering dividing line between sections to the north with economic Haynesville reserves and those to the south with Haynesville and Bossier reserves. Although it is impossible to draw a straight line as the deposition of the two is not defined by the cardinal points of the compass, the transition zone lies somewhere across the 13 North and 14 North townships based on the permitted and drilled wells identifiable as Bossier.
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Permalink Reply by Steve P on -
Skip: Is it correct to assume that for most of the S/2 of DeSoto that the Bossier is present, but also less productive than the HA? It seems that the wells being drilled are mostly HA
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Permalink Reply by Skip Peel - Mineral Consultant on
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My personal opinion is that all townships from 13N south have economic Bossier. So Grand Cane and Grand Cane North fields. The town of Mansfield is in 12N. This is based upon operators making applications for alternate unit wells which include Bossier laterals. Yes, the Haynesville is more productive than the Bossier from there south to somewhere around the lower half of the 10N townships, so about Converse. From there south, the Haynesville is thinning and picking up a greater amount of contaminants (CO2 and H2S). At that point the Bossier is the better reservoir.
Operators in the San Miguel Creek and Bayou San Miguel fields have found that they can drill 2 to 3 Bossier wells along with a single Haynesville well and by commingling the production reduce the contaminants to meet pipeline specs without treatment. There is a significant cost to removing those contaminants in order to send it through a pipeline.
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Permalink Reply by Steve P on
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I own a small amount of minerals in 2-9-12, and apparently Vine did the commingling a few years ago.They drilled 5 wells, which are a mix of HA and Bossier wells.
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Permalink Reply by Skip Peel - Mineral Consultant on
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Chesapeake now operates the Vine HA units.
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