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Myths And Narratives Of The U.S. Oil And Gas Industry


  • A number of market narratives continue to depress valuations of the US oil and gas sector.
  • There appears to be a disconnect where US shale industry is either viewed as too efficient or productivity and economics of the industry is about to implode.
  • The more concerned the market becomes about the penetration of Electric Vehicles and a potential peak in global oil demand, the more likely a severe supply deficit will develop.

In this article, we will take a closer look at the United States (U.S.) Exploration and Production (E&P) sector (NYSEARCA:NYSEARCA:XOP), and in particular address some of the narratives or perhaps “myths” that continue to depress valuations in the sector or at least with respect to the smaller or mid-tier producers. This article follows on from two prior articles, the first focusing on U.S. oil production trends, and the second taking a broader global perspective on the outlook for oil prices over the next few years.

In our view, there are three key narratives or “myths” that continue to depress investor sentiment with respect to the US energy sector:

Myth 1 - U.S. oil production can still increase substantially from current levels, even with oil prices below $60

We already addressed this narrative in our first article where we showed that most, if not all of the incremental oil production in the U.S. will come from the Permian basin and most of that will be light oil or condensate (API of 45 or higher). In our second article, we also briefly discussed the latest Annual Energy Outlook (AEO) publication from the Energy Information Administration (EIA), where the EIA itself expects US oil production to top out at around 12mn bpd by 2020-21, based on a reference price scenario that assumes benchmark crude oil prices to eventually return to the $80-$90 per barrel price level by 2020-22.

In summary, there appears to be a bemusing disconnect in the minds of most investors or market participants with respect to the sector. On the one hand, shale economics is perceived as so attractive that U.S. production will grow sufficiently, not only to absorb the growth in global oil demand over the next few years but also to exceed this same demand growth and lead to a renewed crash in

This article was written by

Leandro is a Director and Founder of Blue Quadrant Capital Management. He is the portfolio manager for the Blue Quadrant Capital Growth Fund, multi-strategy hedge fund, and the Blue Quadrant MET Worldwide Flexible Fund, a long-only unit trust. He has extensive experience in the industry having worked previously as a research analyst and portfolio manager. Leandro graduated from the University of Cape Town with a BCom (Honors) in accounting and economics. In 2007, he attained the Chartered Financial Analyst (CFA) designation.

Analyst’s Disclosure: I am/we are long WLL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (16)

Shale is economic and quite prolific in the cores of the plays.

The problem for most public E&P companies is that they are stuck on the belief that production growth at all costs and at the fastest pace possible is the name of the game.

They throw responsible development and profit to the wind in order to achieve this, drilling far too densely and in areas that are not economic, so as to show production growth and tout "PUDs".

Tens of billions of dollars have been wasted in shale with these practices, and sadly, most of the public companies continue to practice this exercise in stupidity.
Blue Quadrant Capital Management profile picture
WLL is forecasting $750mn in capex for 2018 which will deliver an exit rate production of 136 Mboe per day , up 6% from the Q4 2017 average.

Yes as production increases you need higher "steady-state" capex to maintain that new higher level , but that steady-state level is invariably lower than the prior development capex required to ramp up and reach that level ..

But its Bakken volumes (95%) will actually grow by 14% y/y , the lower overall production growth is due to anticipated asset sales and flat, declining output from its Niobrara acreage. The acreage here is of a much lower quality than its core Bakken acreage , in fact the company may even look to sell off this acreage and focus on the Bakken.

The downside for WLL is that it would then have little real growth upside , but it would still be a cash machine and a potentially attractive takeover target for another Bakken operator that could in theory consolidate operations and extract cost (G&A) synergies.
Thanks Good Read;
Care to comment on how much capex is needed just to maintain production for WILL at 10 or 20 % increase in production. My understanding is as production rises, it will be limited by decline rates from the higher number of wells to get that increase.
When does Aramco do their IPO? Saudis have a reason to keep oil prices high.
CalgaryOil profile picture
Exactly... agendas are getting increasingly difficult to find with LIES prevalent everywhere in the internet age
210 why interject logic? Just buy Tesla and bitcoin. What could go wrong? Jeezee....
More than half of the increase was less than 45 API last year (DEC16 to DEC17):

pct incr LT 45 57%
pct incr 45-50 32%
pct incr GT 50 10%
pct incr ukn 1%

And within the 45+ API oil, very little is over 50.

The numbers are even skewed negative because of the GOM outage in DEC (fire) that reduced GOM by 100-200 M bpd. So if you factor that in, you would get about 2/3 of the growth being less than 45 API.

(That said, we can end up with too much 40-45 oil as well and this is the largest growth area. Amazing that we have too much light sweet WTI! Peak oilers never anticipated that!)
In the oil industry, I see a group of people: OIL Company Executives (limiting production, using buyback, painfully selling assets, reducing capex only to be punished when announced), OPEC , Investors all doing their best to make oil worth investing again and on the other side, some other interest groups destroying everything with a combination of engineered volatility, lies, counter-lies, fear, extrapolation, intoxication, manipulation, biased press releases, data interpretation, fake news and all kinds of means at their disposal. For now, the later group seems to prevail. Unfortunately, I am in the former.
I agree with the analysis in general. My guess is we start to see run up into q1 earnings. I believe his for two reasons: should coincide with big draws when refining season startup consumes more oil which will help with sentiment and companies will have full quarter benefit of >$50 oil (assuming it stays around here) which should see some big beats as I feel street is very skeptical about profitability and production growth. Big beats and big draws will turn sentiment. Weak dollar would help but it remains to be seen how Trump policies will affect dollar since he is so conflicted.
falconcraig profile picture
Well written. I am always amused by peak oil discussions that are “fueled” by the demise of the internal combustion engine...my grandchildren’s grandchildren may be impacted...
Been waiting my whole life for peak oil that never comes
MonteQuest profile picture
jeggle, Had it not been for the GFC that took 8 to 9mbpd off projected 2015 demand of 110mbpd (last time I ran the numbers) off the table in the OECD's, we might have seen it. With conventional peaking in 2008, would LTO been able to close that gap? We will probably never know. Seems rather unlikely, though, especially since we are now concerned about LTO meeting 100mbpd.

Or were you referring to peak oil demand?
Help me out here, please. What is GFC? (I'm even denser than usual toady.)
thanks but can't use this information to take any position in oil.
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