Breakeven Price

Just finished a work project and am going to get back into this a bit.  I haven’t really taken any actions since bailing out of Apache, Chevron, and FCX a while back, and buying a small amount of EOG.   The EOG purchase has only  gone down about 4% or so, quite remarkably.  I’m going to do a post on two historical comparisons that are interesting to think about and may be instructive to our current situation.  But first here’s an interesting chart from a Bloomberg article.  Its from Goldman, trying to identify the areas where drilling will slow and stop.  “Break-even” price is something that the sell-side E&P love to do, but it is sometimes quite hard to get a handle on for a number of reasons.  Here are a few I can think of off hand.

1)     A major part of the break-even price is services cost, which will decline as the price of oil goes lower, lowering the break even.

2)      Take away costs may decline as production stops growing, so the producers get a price closer to benchmark pricing.

3)      Learning is always increasing, and efficiency in terms of oil production per active rig or dollar spent has been on an uptrend in the shale plays for years.

4)      There is a wide range of economics within each play.  Companies that have pads set up and gathering networks in place have a much lower cost.  There are also differences in acreage quality and technical ability that will have an impact.  So if 50% of the rigs leave a play, it doesn’t mean it will produce 50% less oil over the long term.  The inefficient rigs will leave first.

5)      Exploratory drilling may be the first to shut down, and the development pad drilling may continue.  Thus the rig count may decline with little actual effect on production.

One broad take-away from this map is that the mid-continent regions are in bad shape.  Of the three major resource play areas, Bakken, Eagleford, and Permian, it is the Permian basin that is most at risk.  Ironically this is also the area that has seen a parabolic increase in production recently.  But within the Permian there are a wide variety of different sub-plays, with varying economics.