Shale Shock: Another Leg Lower In Oil Coming After Many Producers Found To Have Far Lower Breakevens

Tyler Durden's picture

One of the great unknowns facing the US shale industry, and threatening the recurring rumors of its imminent demise, is how it is possible that despite the collapsing number of oil wells, and despite the plunge in crude prices which supposedly are well below all-in shale production costs, does production not only refuse to decline, but in fact has been largely increasing in the past 6 months, with just a modest decline in recent weeks.

 

The answer may come as a surprise not only to industry pundits, but certainly to Saudi Arabia, whose entire strategy has been to keep pressuring the price of oil low enough for long enough to put as many "marginal producers" in the US shale space out of business as possible.

According to a report by the Bloomberg Intelligence analysts William Foiles and Andrew Cosgrove, Saudi Arabia may have its work cut out for it as it will be far harder to kill many U.S. E&Ps than analysts originally thought.

The reason: a break-even model for the Permian Basin and Eagle Ford shows that oil production across five plays in Texas and New Mexico may remain profitable even when WTI prices fall below $30 a barrel, according to a 55-variable Bloomberg Intelligence model for horizontal oil wells. 

The Eagle Ford's DeWitt County has the lowest break-even, at $22.52, followed by Reeves County wells targeting the Wolfcamp Formation, at $23.40. The diversity of breakevens highlights the hazard posed by looking for a single number, even within a play.

These counties together produced about 551,000 barrels of liquids a day in October. Taking into account drilled but uncompleted wells boosts the number of potential survivors to 19. The wide range of break-evens undermines efforts to come up  with a single threshold for U.S. shale producers.

The full list of breakevens by county is shown below:

 

To corroborate its model of break-even levels for oil producers in the Permian and Eagle Ford, Bloomberg used a Baker Hughes' horizontal rig counts in the Spraberry play Permian and Eagle Ford. Howard County, Texas, has the lowest average break-even, at a WTI price of $29.19 a barrel. Its rig counts have doubled since oil prices began collapsing in mid-2014. In Midland County, at $30, rig counts are up 56%. Counts in Irion and Reagan counties, with two of the highest break-evens targeting the play, have fallen more than 70%.

 

None of this would be feasible if average breakeven prices were anywhere close to the $50-60 assumed by the consensus.

But where Bloomberg's analysis gets outright disturbing, if only for Riyadh, is that once wells are completed, breakeven costs tumble to Saudi-like sub-$20 prices in some countries.

From Bloomberg:

Tapping drilled but uncompleted (DUC) horizontal oil wells drops break-even WTI oil prices to less than $20 a barrel in eight county-play combinations in the Permian and Eagle Ford. The analysis assumes that drilled wells are sunk costs and that drilling constitutes 30% of a well's total cost. The 55-variable model shows that the impact of removing drilling expenses varies significantly by county and play, with break-even reductions ranging from $7.24 to $21.51, or 28% to 42%.

 

Bloomberg proceeds to crown DeWitt County, Texas, as the King of Shale due to its lowest breakevens across the land:

DeWitt County, Texas, has on average the lowest break-even WTI price for its oil production among 29 county-play combinations in Texas and New Mexico, at $22.73 a barrel, according to a Bloomberg Intelligence model. Shifts in drilling in the Eagle Ford may reflect differing  cost levels. Dimmit County, with a break-even of $58.21, led the Eagle Ford in 1Q15 with 226 new horizontal oil wells, four times as many as DeWitt's 56. Two quarters later, Dimmit's new wells fell 71% to 65, while DeWitt's surged 77%.

 

There is far more in the comprehensive analysis, but the punchline is simple: what many thought would be the "breaking" price point for virtually every shale play has just been lowered, and quite dramatically at that. It also means that algos and traders who had reflexively bought any dip below $30 on expectations this is close to the "sweet spot" and where the Saudis would relent, will have to drop their support levels by as much as a third! 

Finally, it means that if Saudi Arabia truly means to put the marginal non-OPEC producers (read efficient U.S. shale) out of business, it will have to pump far more not less as many speculate, and worse, it will have to ramp up production very fast because as is well known by now, the Saudi Kingdom is itself hurting profusely as a result of low oil prices which are leading to budget crunches and domestic austerity such as soaring prices of gas and water.

Finally, since Saudi Arabia had expected that its FX reserve outflow would last only temporarily using $40-50 breakevens, it will have to sell many more US reserves (either TSYs or stocks) to fund the cash shortfall which will persist for far longer until oil catches down to the lowest cost US producers, which as of today's close are at least $10/barrel lower.

In short: the oil price war is about to enter its far more vicious, and far more lethal phase, and while it is unclear who ultimately wins, whether it is Shale or the Saudis, the loser is clear: anyone who bought into bets of an imminent oil bounce.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Boomberg's picture

This is the same Bloomberg whose lead article on their website this morning was oil to hit $60/bbl by year end.

knukles's picture

. How do deaf people know if someone is screaming or yawning?

Handful of Dust's picture
Oil Slump Hits Houston Home Market

 

HOUSTON—Home sellers are slashing prices and offering incentives to keep buyers from walking away from contracts as an 18-month oil slump buffets this city’s once-booming housing market.

 

http://www.wsj.com/articles/oil-slump-hits-houston-home-market-1453163797

 

One might say the housing market in energy cities is getting, "Monkeyhammered."

0b1knob's picture

Who cares about break even?   These companies are fighting to survive.  The need to pay interest on debt, taxes and payrolls. 

Of all the stupid ideas repeated over and over on Zero Hedge the idea that oil companies will stop producing when the oil price drops below their break even point is the STUPIDEST.

 

Has anybody at Zero Hedge ever heard of the principle know as the "Sunk Cost Fallacy?"   Look it up.

AldousHuxley's picture

BIG OIL Still in denial mode ....."temporary set back....I'm a long term investor"

Capitulation is yet to come.

We will know when BIG OIL executives change industries and Saudis visit the whitehouse more frequently 

giovanni_f's picture

A model with no less than 55 (!) variables. Pseudo-scientific snot.

Bloomberg at its patriotic best.

Serfs Up's picture

I'll bet you anything this "model" also takes the ONE KEY VARIABLE. the amount of oil that is projected to flow from a well (the EUR), as gospel from the companies' statements.

Some are claiming 1 million BOE from wells that can easily be shown to be producing less than half that on average.

Which means you can take their "breakevens" and multiply them by a factor of 2 or more.

Or you could just look at the earnigns statements from the companies in those plays and see them bleeding like they've been gut shot through the liver.

So Close's picture

Reporting (again) from the Texas Oilfields...   If these fuckers think we are standing still guess again.   I got news for you baby.  "Super Frack" is a term you ought to learn.  Whatcha gonna do when we can go toe to toe and dollar for dollar with you Saudi?  That day is coming.  Long live the (Smart and Hard Working) Texas independents.  And as Steve Jobs used to say..  Oh Yeah.. there is just one more thing...  

Ignorance is bliss's picture

Hope you are right bro..love the cheap gas and have no need for Saudi and their bullshit kingdoom;

MalteseFalcon's picture

"One of the great unknowns facing the US shale industry[LOL unknown to joe six pack and ZH], and threatening the recurring rumors [rumors spread by oil-soaked controlled media and ZH] of its imminent demise, is how it is possible that despite the collapsing number of oil wells, and despite the plunge in crude prices which supposedly are well below all-in shale production costs, does production not only refuse to decline [It appears that way because an assumption was made that is not based in fact, because the actual facts are elusive], but in fact has been largely increasing in the past 6 months, with just a modest decline in recent weeks."

"USA ran out of oil in the 1970s"

"The only oil left is in the Middle East."

"Dinosaur dropping will run out by 1985."

Wake the fuck up

Oil is the original totally phoney, totally controlled market.  It is the second great strand of population control, preceded by fractional reserve banking and followed by medical control (vaccines, birth control, euthanasia, GMOs).

Non Merger's picture

Good post, MF.

This video is the best summary I've seen that ties together big oil, fractional reserve banking, AND the pharma/health rackets:

https://www.corbettreport.com/how-big-oil-conquered-the-world/

 

 

monk27's picture

There is one more thing: your super fracking BS still has a half-life of about 1-1.5 years. Which means that the wells started at the beginning of 2014 are already at half production rate and falling fast. In all this time you are poisoning your land and water, but that doesn't count... yet. Enjoy !

de3de8's picture

And as knob states,it just doesn't apply to oil sector

jerry_theking_lawler's picture

Yes. And I certainly agree...except oil production (especially in some of these horizontal or shale plays) has a steep decline over time. This means their cash flows from each well is decreasing over time...and at some point they can't cover their variable costs and therefore can't survive. If the easy credit is dried up....we will see how long these guys can last. I would predict most will be bankrupt by 3rd Qtr 2016. But even bankruptcy has another problem with it. This bankrupt companies will sell the assets (in this case wells) for pennies on the dollar and if there were any wells marinally producing under one company then the new company may can come in with some small investment (fracing, recompleting, etc) and get the well producing larger volumes again. Will be interesting as I think now the non-Federal Reserve wants to see oil go back up because it is wrecking the stock market.....

To put it simply.....This is what you get when markets are manipulated.

bearwinkle's picture

Maybe their eyes bugging out of their head might be a clue.

Yen Cross's picture

 At least they don't live in the vacuum of Earthspace, like the rest of the FSA> Useless Eaters> Knuks.

 Where's my free TOTUS phone?  :-D

 * P.S. I need to lay off the extra spicy corn nuts.

venturen's picture

Oil should have never gone above $25/brl. It only got there because the Goldman etc...made BILLIONS manipulating the price. You see the middleeast...AWASH in money...they aren't at BREAK EVEN...they were MINTING IT. Now you have ACTUAL COMPETION AND THE banks are somewhat prevented from rigging the market...SO GUEST WHAT PRICES GOING TO $18! A bit of an over shoot...but it is going there PERIOD!

The best Sun's picture

So drill and then bankrupt drillers (socialise the losses).

Then phoenix the wells to "new" owners at the much lower break even point.

Since the expense has been incurred by the original chapter 11 driller.

Tax payer eats the losses as usual.

Evil genius.

SafelyGraze's picture

more shocks are coming!

at my weekly golf game with tptb, they talk about the immense quantities of oil under gull island. 

the oil gushes out so much, why, it practically pays *you* $30 per gallon just to catch it in your supertanker.

http://lindseywilliams101.blogspot.com/2011/06/lindsey-williams-liberty-...

hugs,
lindsey

 

daveO's picture

Tax payer eats the losses as usual.

It's not all that bad if it bankrupts Saudi Arabia, the number one sponsor of Jihad, rapefugees and the spread of Islam. It's a good trade.
Agstacker's picture

For the past 5 years I've been working as an independent petroleum landman, building abstracts of title for oil and gas companies before they drill (not doing that any more of course).  One thing I always seemed to see building these was the mortgage from the company to the bank, JP Morgan being one that seemed to pop up again and again.  All the wells the company owned were mortgaged for a line of credit, and the number on the mortgage was usually anywhere from at least 250 million to 2 billion dollars.  

 

These banks will end up owning the wells, which was their plan all along, and then the price of oil will skyrocket.  

Gregory Poonsores's picture

Wait, so they're not going bankrupt?

And 75% of rigs were stacked because of...

MOB666's picture

when some are hedged thru till 2019 for $50-60 things still look good

digiblader1's picture

Crap article. Tell that to all the oil workers who are losing their jobs and all the production budget cuts.. prices are going to spike nonetheless when OPEC cuts and/or production collapses once hedges on prices come off. 

cowdiddly's picture

It Bloomberg, what do you expect. It propaganda BS articles like this that sold the shale miracle to everyone in the first place.

VinceFostersGhost's picture

 

 

It Bloomberg, what do you expect.

 

Sheer and utter panic?

Lore's picture

Sympathy comes hard.  Industry operating costs are out to lunch. Average starting wage for the sector in Canada in 2014 was $120K.  I imagine the American equivalent is similarly wacko.  The industry needs to make radical adjustments from top to bottom.  Most importantly, losses must not be socialized. Something like this has been coming for a long time. Ideally, conscientious management should view the situation as an opportunity to clean out root rot. 

Yen Cross's picture

  The producers and their lenders " lie like rugs" about break-evens, and extraction costs.

  O/T > Pull your trousers up kiddies. PBOC to inject 150bn yuan through open market operations today

  Is there any question that the PBoC wasn't selling $usd this morning? They're chewing through reserves, like a Grizzly Bear, fresh out of hibernation.

 The game continues.

Dragon HAwk's picture

Yeah sounds like a propaganda piece to me.

digiblader1's picture

Yep--besides, the potential huge drops in production at the Bakken reserve and any other shale area outside of Texas wil offset it, sending prices soaring--remember, there is VERY little spare capacity in world production. If it disappears, crude could double or even go to $100/barrel quickly due to supply deficits.

Ms No's picture

They are most certainly full of shit about their break even prices and they seem to change constantly.  The cost to drill a well will give that away.  They better have it paid off in 4-5 years. 

Just more magic banker games until they pull the rug out.

flyingpigg's picture

BS indeed...break-even analysis only applies to new wells if nobody drills dry holes anymore...

digiblader1's picture

BTW, Brent crude is trading at a premium to WTI of $1.20 right now--could be a sign supplies are tightening in the rest of the world outside the US because of low prices hurting production and the high supply at Cushing.

The best Sun's picture

Bull pucky.

Forgotten about Iran coming online have you?

And did all those full tankers suddenly sink beneath the waves?

Tightening supplies my pert and well muscled ass.

Maybe when the ME wars kick off full scale.

Chad_the_short_seller's picture

What a crock of fucking shit!! 

billybobtx's picture

Dewitt was a big Penn Virginia area...now trading at .06

Doubt if those wells are that low break even the way companies were throwing around money to get leases.

SirBarksAlot's picture

I thought that Obama lowered the price of oil to try to bankrupt Russia.  Then the story broke that it was actually the Saudis who were responsible for determining the price.  And then, that ISIS was the one selling the black market oil, under cutting the price. 

Who controls the Saudis?  Who controls the Petro-dollar? 

daveO's picture

FED funny money. When it started drying up, the Saudis had to ramp up production to maintain income. If you read much ZH, you know they are now burning through their savings. All these type of articles are propaganda.  

swmnguy's picture

I don't suppose Bloomberg and the rest of the finance industry have any motivation to protect people's faith in the quality of HYD owed by drilling companies, would they?

henry chucho's picture

The "break-even" for shale,according to the Banks that finance the loans,was $80 a barrel 2 years ago,when WTI was trding at $90,then $60 a year ago,when WTI was $65,then $40 6 months ago,when WTI was $45,then $30 a month ago,when WTI was $35,and now $25,as WTI has dropped into the $20's..

monk27's picture

Funny how all these companies which "break even" at 30 $ and change, couldn't make any money even when the oil price was 100 $. Articles like this are a sign of true desperation...

Angry Plant's picture

When shale was first starting breakeven was estimated at $80 a barrel.

Then they went into mass industrial production of shale. People are now surprised the real cost are now far lower then intial start up shale costs were.

digiblader1's picture

Another oil company laying off:

http://www.bloomberg.com/news/articles/2016-02-03/weatherford-to-cut-6-0...

And where's new production going to come from with all these cuts? That's why prices are going to soar by later this year--no new supplies coming online to replace depleted wells due to $30 oil. 

FedFunnyMoney's picture

Oil wars, currency wars then world war. To refine Gerald Celente's quote just a bit.

Cashboy's picture

Sorry but those figures do not stack up.

I would say that is propoganda probably to stop fears of the bad debts of the banks in the media.

What one needs to consider is that if shale oil is profitable at US$30 in the USA, then the cost of oil in Russia would be about US$7 a barrel.  On top of that the Russian ruble has fallen by 50% making Russian oil exports even more viable.

 

 

 

Dirtt's picture

Maybe the real lie was that shale was unprofitable below 50-75 bbl. Maybe fracking was so successful that King Dickobama et al suppressed the real returns. 

Maybe. Just maybe. Alternative energy is dead for another generation while fossil fuels give real technological advancements in solar a chance to make real gains outside of the fucking Progresssive Mafia Ideology.

Obviously. Time will tell. But if the hard core bad ass American frackers can outlive this gulch of prices then maybe the truth is in this article. Maybe.

monk27's picture

Maybe not ! Half life for fracking wells is 1-1.5 years. Get that through your skull...

MSimon's picture

And the half life of a desk top computer is about 3 years. We have come quite a ways since the CK722. Is the same thing happening to fracking? Why not. It is usual for new technologies.