If investment in the industry is falling off a cliff then it won't be too long before the production does as well. The rates of decline of these unconventional wells is a lot higher than conventional wells and the only thing sustaining this level of production is investment. One thing investors don't like is loosing money and shale has more or less proven to be a money loser at current oil prices. Sentiment is beginning to be lost for the US shalers and once investments are on the nose investors stay away. There will not be a rush of new money for this industry unless the price of oil spikes hard.
As I've posted earlier, according to some reports there are going to be between about 3,000 and 5,000 shale wells spudded but not stimulated in the US by the end of this year. The question is will these wells end up being stimulated and start contributing to the supply side in the near term or not? Given that some reports suggest that up to 60% of the sunk cost of a well is in the stimulation this represents a very significant investment that has not been made and there is no certainty that it will be made in the near term. The difference between say these shale wells and say the oil sands in Canada is that the investment landscape in US shale oil is fragment, being run by a larger number of smaller entities that have to make investments based on the health of their own balance sheets and the available credit that is being held out to them by the banks and bond investors on which they rely. The oil sand projects are large and multi generational and the finance on individual projects is measured in the billions not the tens of millions. Having committed the billions these oil sand projects in Canada will proceed irrespective of the short term oil price. A bit like how you see the Chinese magnetite players in WA just ploughing ahead. The short term prices are less important for the larger projects.
There is also another less commonly know fact about the proliferation of shale oil wells in the US which comes to me directly from a friend of mine who has been in the oil game all his life and has worked for companies big and small and governments as well. He originates out of the US coming from Chicago so should know what he is talking about. He told me that when oil companies go to drill in many of these American states they need to negotiate with the landowners before they start. It is not like here in Australia were the minerals/resources belong to the crown and the law is very much skewed towards the mining companies over the landowners who generally have very little say. In the US the negotiations with the landowners often come down to negotiating on how many wells are drilled. The landowners want more wells as they get compensated on this basis. The more wells the more money for the landowner, so the drilling proliferation has also been driven by this right of access affect. An affect that has little bearing on the overall economics behind the drilling of each well. This is what happens when industries are driven by "risk" free central bank engineered credit expansion. A little while ago I made a short video from some interactive data that I sourced from the Kansas Geological Survey as I was interested to see the well intensity as I'd read reports about re-injected waste water from shale wells having causing earthquakes in those states (way over and above historical norms and with magnitudes reaching up to 4 on the richter scale). The link to the video is below. It shows the density of permitting in Kansas and number wells spudded in a 90 day period. Another report I read recently has seen some companies doing deals with local municipalities to buy treated sewerage to use for injection into wells. The industry from my perspective is well and truly on the skids.
It is not easy picking the very bottom in oil stocks on ASX but close to the bottom is good enough for me. If the broader market should tank further (which I personally don't think will happen) I've got some money in reserve and will try and assess at that point if oil is still a good gamble based on what emerges out of the dust.
My bias currently is that we are near a bottom so I've spread my weighting accordingly. I don't have a lot of fear from this point on with some of these ASX oil stocks. The market has it wrong in my opinion. Only time will tell and I'll only have myself to blame if I've read it completely wrong.
Eshmun
DYOR IMHO
DLS Price at posting:
55.7¢ Sentiment: Buy Disclosure: Held
