It’s easy to make money in the oil patch at $100 a barrel, but it takes a much smarter plan of action to excel now that we’re hovering around the $40 mark. Forward thinking operators are looking to buy production in the ground, and are focusing their attention on where the hidden values are. Here are three things to keep in mind about the oil and gas business.
It’s all about the rock
Hydrocarbons are trapped deep underground in incredibly complex geological structures that you need to understand very clearly before you rush into drilling/completing/stimulating/buying or selling decisions.
You need to be able to pick a specific area of interest (for example all of the horizontal wells drilled in the Eagle Ford since 2011)
It’s All About Productivity
As rig counts have gone down by over half since October of 2014, we haven’t seen the same steep decline in productivity that we saw during previous downturns. We introduced the DI US Well Productivity Index this last February to help demystify the sometimes tenuous linkage between rig counts and the actual hydrocarbon producibility they help bring on.
The chart above highlights the difference between new drill permits, rig count (around a 2 month lag), oil max month producibility of the wells drilled within that month, gas max month producibility of the wells drilled within that month, and BOE (6:1) max month producibility of the wells drilled within that month. Notice that the rig count has dropped more than the producibility of both the oil and the gas these rigs are targeting. Said another way, a combination of higher grade locations and better practices are yielding substantively better wells month over month per rig/month.
Since the first of the year, per rig month max monthly oil yield has risen from 0.30 M barrels of oil per day per rig month to 0.45 barrels of oil per day. That is a 50% increase!
It’s All About Who You’re Doing Business With
One of the more tedious and pesky chores in oil and gas is keeping up with leasing activity. Multiply that tedium 10 fold and you have “keeping up with the assignment” of those leases.
Working from filing data alone doesn’t give you a clear picture of who is actually operating on a specific lease. Only by adding in a “spatial assignment” in addition to the grantee can you get the information you need.
In the upper left image, we are looking at lease polygons by grantee. In this case, the tracts on the upper left are ones leased directly by EOG. The total gross acreage of some 350,000 acres is only 60% of what it has told oil and gas equity analysts and shareholders its overall position is. On the lower right view of “assignments” rather than “grantee” we get to within 1% of its explicitly stated leasehold position!
The survivors in today’s bear market must embrace three fundamental analytics: descriptive, predictive, and prescriptive. The threshold descriptive analytic tells you what is going on right now. The predictive analytic then describes what will happen in the future if you do not change current behavior. The third, and most important, analytic tells you have to change your behavior to produce best in class results. Doing so allows any market participant to not only survive today but thrive tomorrow when the inevitable bull market returns.
What do you think? Leave a comment below.
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