Cost are coming down

[dan_s]

One thing to remember is that the Finding & Development costs ("F&D") are coming down a lot in the major shale plays as companies move to pad development drilling. The smart engineers at the drilling companies (like UNT, PTEN, PDS and HP) and the oilfield services firms (HAL, SLB, BHI) have done a great job working with the E&P companies. As F&D costs per boe of new proven reserves come down and the wells are holding up better, the financial returns are going up.

I am expecting 3rd quarter results to be much better than Wall Street is expecting and I also think year-end reserve reports are going to be impressive.

I am not the only analyst that feels this way.

E&P Weekly: US Unconventional Oil: Sliding Down the Cost Curve
Evan Calio – Morgan StanleySeptember 29, 2014 6:16 AM GMT
We believe rapidly improving US unconventional IRRs have lowered cash breakevens up to 30% since mid- 2012, the last major oil price drop (and Saudi cut). No longer “marginal”, and trading at a historically wide variance to WTI, we believe oily US E&Ps are attractive.

Lower break-evens, the flipside of higher IRRs (pg 3-5). All energy drops drive similar questions, breakeven economics are among them. Inverse to materially higher US unconventional IRRs, cash breakevens in major US plays have dropped by up to $30/bbl since 2012 (range $30-mid $60/bbl), the last major oil drop (and time we were broadly asked this question). Given current well performance data, largely above type-curves and ongoing drilling and completion optimizations, we believe there remains significant upside to IRRs and downside to break-evens of $30-mid $60/bbl. Many US unconventional plays are no longer “the marginal barrel” and, growth and cash flow will be more resilient at lower oil prices.

Historical dislocation of E&Ps to crude (pg 2). We remain constructive E&Ps that are trading at a 2.3 standard deviation variance to WTI, one of the widest variances since 2009. Given relatively improving IRR and asset base, we believe this is a buying opportunity, just 3-4 weeks away from seasonal oil demand (with recent Saudi cuts). This week E&Ps underperformed the S&P 500 by (1.9%) and flat with MSCI O&G Index. HH +3.8%, Brent (1.4%) & WTI +1.1%

Bullish oil shale; bearish natgas. Last week, we published the 3rd edition of our shale data book (Shale Data Book – Fall 2014, Volume 3). We highlight that permitting data, a key leading production indicator, is up 40% from the 2013 quarterly average, supporting our positive view on growth. Also, interactive maps, a new feature, shows time-lapsed activity for major US shale plays since 2009. Conversely, we remain cautious on natural gas and published, Cross-Industry Implications on Marcellus/Utica Basis, 9/25/14.