Energy Prospectus

U.S. Bank Chief Investment Officer John De Clue, in a presentation to Denver area businesses, called for oil prices to eventually settle back at $60 per barrel.

http://www.oilandgas360.com/oil-will-se ... 0-26401157

I agree we will see $60 oil again, but I think it happens much sooner than he thinks. Supply/Demand are tightening very fast now.

For the current price forecasts for WTI and NG to be correct E&P companies must be able to make a satisfactory ROI at those prices. Otherwise production would continue to fall and drive prices higher.

My questions are:

1.What is the target ROI for a sane E&P?

2. What WTI or NG price would yield that ROI in:

a. The Marcellus

b. The Permian

c. The Bakken?

My perspective is that the current forecasts would not yield sufficient ROIs and that the forecasts are too low as the forecasted prices would not yield sufficient returns to justify investment.

The current prices I am reading for Marcellus producers - sub $1 seem ludicrous. Why a well owner would slit their veins and bleed at these prices is beyond me.

Help.

Bob

When I was at Hess, our ROI threshold was 30% to fund any new project. At the current oil price, there are very few areas that will generate 30% ROI. This is why the number of active rigs has dropped so far and it will keep falling. So will production.

Keep in mind that there are "Sweet Spots" in all of the major plays were even $45 oil will yield a decent ROI.

Here is where you can see estimated breakeven prices for most of the U.S. regions:
Go to: http://investors.jonesenergy.com/invest ... entations/
See slide 6 of the presentation they made on September 9

Because drilling & completions costs have come down more than 30%, if WTI gets back to $60/bbl activity will pick up. My guess is that we need WTI to stabilize over $70/bbl before we see U.S. oil production begin to grow again.

Gas prices in the Marcellus will go up this winter because several big midstream projects are nearing completion that will allow them to get gas to better markets. Read our profiles on RRC and GPOR.

New drilling may not be justified at $45 WTI in many areas, but upstream companies can still generate decent cash flows from operations at that price. All in cash costs of getting the oil out of the ground and to market are less than $20/bbl for most companies. For most of our Sweet 16 it is under $15/bbl.

All in cash costs include LOE, Production Taxes, Gathering, Processing, Transportation and Marketing expenses.

This is why we are not going to see a lot of bankruptcies among the upstream companies. As long as they can pay their vendors and interest on their debt they will survive. Energy sector banks know that forcing a company into Chapter 11 is unwise.

dan_s wrote:When I was at Hess, our ROI threshold was 30% to fund any new project. At the current oil price, there are very few areas that will generate 30% ROI. This is why the number of active rigs has dropped so far and it will keep falling. So will production.

Keep in mind that there are "Sweet Spots" in all of the major plays were even $45 oil will yield a decent ROI.

Here is where you can see estimated breakeven prices for most of the U.S. regions:
Go to: http://investors.jonesenergy.com/invest ... entations/
See slide 6 of the presentation they made on September 9

Because drilling & completions costs have come down more than 30%, if WTI gets back to $60/bbl activity will pick up. My guess is that we need WTI to stabilize over $70/bbl before we see U.S. oil production begin to grow again.

Gas prices in the Marcellus will go up this winter because several big midstream projects are nearing completion that will allow them to get gas to better markets. Read our profiles on RRC and GPOR.

I assume break even is zero profit. Ergo - no one would invest at the break even price.

Some wells will be drilled in areas at breakeven (or even less) to hold acreage. Take a hard look at the slide I recommended above. For each are a price range is give, not a single point for breakeven. There are a lot of variables. Geology under each drillsite is different.

If WTI stays at $45, we will see the active rig count continue to drop. And it will drop a lot.

This won't happen because at $45/bbl global oil production will fall fast. It is happening today. We need much higher prices to meet future demand for refined products.

As I have said here many times. This oil price cycle looks very much like all of the other (exclude 1986-1990). They all last about two years. We are in month 15 of this one. We have completed the 3rd and final test of the low. As supply & demand tighten, the price of oil has to move back up. If not, the world will see a significant shortage of fuel supply.

WTI has been range bound at $44-$47 in September. Several closes above $47 should open the way for another leg up.

As oil prices move back toward the trend line there will be many stops and starts along the way. Go take a look at a 10-year chart for WTI. We are following a path very much like 2008-2010.

Dan, we seem to be assuming lower production = higher oil prices = higher energy stock prices, but I have been noticing an increasing number of days where oil is up, the market is down, and our stocks have followed the market action rather than the oil price action. That concerns me as the mkt is looking like it would rather go down than up. Your take?

My brain is not big enough to figure out the day-to-day moves in the stock market. Keep in mind that most of the trading is done by big funds. When they have withdrawals they have to sell something to cover them. Often they "throw the baby out with the bath water". Lots of fund managers have moved to the sidelines. Lots of cash waiting for the tide to turn for the energy sector.

EVENTUALLY, fundamentals will drive up oil & gas prices. Declining supply and increasing demand will drive up commodity prices. Look for EIA and IEA reports to show a much tighter market.

U.S. oil production has dropped 600,000 bbls per day in the six months ending 9/30/2015. By 3/31/2016 U.S. production will have dropped 1.2 million bbls per day from 9.7 MMBOPD to 8.5 MMBOPD. In my opinion, it is already too late to keep this from happening. Today Oppenheimer took a first dig at Goldman's forecast of $20 oil. There was another article from Morningstar today that US shale production will fall to 8.2 MM barrels/day by 2016 for a drop of 1.4 MM barrels/day from the peak. A few days back Tudor Pickering Holt said that if the supply drop in US is drastic, then they have to be bullish for oil price to rebound.

I believe we are going to see an acceleration of the U.S. production decline in Q4.
> CEO's are slashing capital spending budgets
> Weather does impact field work, especially in the northern areas like the Bakken and Niobrara
> The active rig count is dropping and completions are dropping even faster.