In January 2019, a piece of Rystad Energy analysis concluded that the economics of commercial acreage positions with significant activity would remain robust in a $50 WTI world. Nearly a year later, we return to the fundamental question of breakeven prices, taking a closer look at how the economics of US shale has evolved in the last year by analyzing data from the most recent vintages, meaning wells completed in 2018-2019 with at least four months of available production reports.
In our analysis, WTI breakeven prices (which are calculated for every single oil producing well in ShaleWellCube) take into account drilling and completion costs, lease operating expenses, production taxes, royalties and overhead costs (transportation, price differentials and G&A). Production for each well is forecasted utilizing the best-fitting Arps model. Natural Gas Liquids (NGL) and gas prices are kept fixed at $15 per barrel and $2 per million British thermal unit (MMBtu), while the oil price is varied until the net present value hits zero. The annual discount rate is set to 10% in our calculation.
Looking at all horizontal oil wells in major liquid basins (Permian, Bakken, Eagle Ford and Niobrara), we have analyzed the evolution of P50 WTI breakeven prices by vintage (Figure 1). The interquartile spread for each year can also be seen on the chart to illustrate the variability in well economics. Here we see that the period of 2013-2016 was associated with the most significant improvements in well economics, with P50 WTI breakeven prices declining by more than 50%. This was driven by a combination of structural learning, high-grading and the dramatic service cost deflation during the downturn. Since that time, P50 WTI breakeven prices have been close to $45 per barrel despite some cost inflation in 2017-2018. In 2019, our preliminary assessment suggests that P50 WTI breakeven prices have slid below $45 per barrel for the first time in the history of US Shale, though we believe that the recent downward cost pressure on proppant and pumping will become more visible on P50 WTI breakeven prices in 2020. In other words, we expect a more significant downward shift in P50 WTI breakeven prices next year. We observe the lower quartile of WTI breakeven prices at around $34 per barrel. This implies that 25% of wells delivered more than 10% of returns at an oil price of $34 per barrel, even when G&A and transportation overhead is taken into account (as long as operators are able to achieve $15 per barrel NGL and $2 per MMBtu gas realizations).
If we look at P50 WTI breakeven prices by basin, we see very similar trends over time, though with a few conceptual differences. The Permian Basin has systematically seen the lowest P50 breakeven prices across all major liquid areas since 2015, although P50 WTI breakeven prices fell below a $40 per barrel only in 2016. Since that time, the reversion of a high-grading trend combined with service cost inflation has prevented the basin from achieving further improvements in well economics. In contrast, Bakken and Niobrara have seen P50 WTI breakeven price improvements every year between 2013 and 2019, and both basins currently exhibit $46 per barrel P50 WTI breakeven prices. Eagle Ford saw around 5% degradation in P50 breakeven prices between 2016 and 2018 – much more significant than the Permian Basin. At present, the P50 WTI breakeven price at Eagle Ford is $49 per barrel, the worst performance among four analyzed basins. Apart from core areas in Karnes and De Witt counties, Eagle Ford’s inferior well performance compared to other basins offsets the positive impact of the basin’s proximity to the Gulf Coast market. Eagle Ford also saw an increased contribution from non-core counties, as activity in many core acreages declined with large producers prioritizing Permian development.
The price trends in three core sub-basins of the Permian also stand out, in Midland North, Delaware Texas, and Delaware New Mexico. Based on currently available 2019 data, the P50 well economics in Delaware Texas exhibit a quite material deterioration, as P50 WTI breakeven prices in the basin are about to hit $50 per barrel – a 40% increase from the P50 breakeven prices seen in Delaware TX in 2016. This trend is associated with significant contribution from spacing tests and increased activity in less proven parts of the basin, as well as tests across less prospective zones. Meanwhile, Delaware New Mexico and Midland North exhibit very robust well economics with $40 and $35 P50 breakeven prices, respectively. It should be noted that few operators in the Permian have been able to achieve $15 per barrel NGL and $2 per MMBtu gas realizations in 2019. If actual realized prices are used to calculate the oil breakeven price, the economics of Midland North are not much affected, unlike Delaware Texas and (to a lesser extent) Delaware New Mexico, where gas and NGL content frequently accounts for 50% to 70% of the total production stream. Hence, in the current gas and NGL price environment, Midland North looks relatively more attractive compared to what is seen in Figure 3. Delaware New Mexico is also relatively more attractive than Delaware TX due to slightly lower than average gas content, but is close to parity with Midland North (as opposed to the superior WTI breakeven prices in Figure 3). In our view, the degradation in gas and NGL economics have been the main drivers behind the material rig count decline in Delaware Texas this year.
Our analysis has considered all acreage positions with at least 30 horizontal oil completions from 2018-2019 which have more than three monthly production reports. For the purpose of this commentary, acreage is defined as a combination of operator and sub-basin. Additionally, we have looked at median (P50), P25 and P75 WTI breakeven prices. Figure 4 shows the 50 acreage positions with the lowest P50 breakeven prices. Similar to our observation last year, all P50 values are below $46 per barrel. Interestingly enough, the two lowest P50 breakeven prices were achieved by the same operator in different basins – Oxy in the DJ Basin (legacy Anadarko) and Oxy in Delaware New Mexico. In our previous ranking, both acreages were also observed in the top seven. There are 15 acreage positions with P50 WTI breakeven prices of $35 per barrel or lower:
- Midland North: Pioneer Natural Resources (PXD), Encana (ECA), Chevron (CVX), CrownQuest (CRWN), Sabalo Operating (SABA) and Endeavor Energy Resources (ENDE)
- Delaware New Mexico: Oxy (OXY), ExxonMobil (XOM), Mewbourne (MEW), EOG Resources (EOG)
- Delaware TX: Chevron (CVX) and Felix Energy (FELI)
- Bakken: Marathon Oil (MRO) and WPX Energy (WPX)
- DJ Basin: Oxy (OXY)
There are four acreage positions among the top 50 which exhibit an interquartile spread of less than $10 per barrel, which is indicative of highly standardized well results: OXY and EOG in Delaware New Mexico, PXD in Midland South (note that Upton County is defined as Midland South) and Petro-Hunt (PTRH) in Bakken.
Figure 5 shows the average first year oil recovery per well for the same acreage positions (the top 50 based on WTI breakeven price). Here we see that higher oil productivity does not always lead to improved oil economics, as high production is frequently accompanied by high costs. For example, OXY/APC acreage in the DJ Basin exhibits the lowest first-year oil recovery per well among all 50 assets. Yet low well costs, along with some revenue support from associated liquids-rich gas, places the acreage at the top of the list, with the lowest WTI breakeven oil prices.