Thank you once again Arjun for systematically laying out the dynamics of Shale 1.0.
As for, "How can you tell an investor you get 30%-100% well IRRs when you aren’t even completing the wells you drilled?", I remember going through presentations after presentations, apart from 10Ks and 10Qs, from various E&P managements trying to figure out the exponential drop in well rates but coming frustratingly short of a realistic model. The only thing advertised (apart from the inflated IRRs) were the inflated initial production rates, as if that was a sufficient metric, along with implications that that an entire area/acreage had the exact same IP rate. Decline curve analysis seemed to be an esoteric art. (This was between 2011 and 2016.)
One gigantic rationale that I have highlighted for years, you miss here Arjun but you know it: “greater fool”. As in “you grow and you grow and then you sell it to Exxon”.
Excellent explanation of ‘Shale1.0’. One other thing that was severely lacking during Shale1.0 and might impact 2.0 ROCE is the use of deterministic decision making instead of probabilistic. Subsurface will always have uncertainty. If full-field development decisions are based on ‘EV’ economics without accounting for the downside risk, that could potentially lead to significant over capitalization (and lower ROCE). It’s about maximizing risk-adjusted returns and not simply returns.
Arjun, it must have been very difficult for you to compare your NY Yankees to Shale 1.0. As a Red Sox fan I would note the similarities are very strong, given all the money the Yankees have spent over that period to little avail. Here's to hoping that Yankees management are not reading your posts and taking lessons on how to build a roster.
Thanks for sharing and writing. Perfectly encapsulates the 2014 - 2020 time period.
Thank you once again Arjun for systematically laying out the dynamics of Shale 1.0.
As for, "How can you tell an investor you get 30%-100% well IRRs when you aren’t even completing the wells you drilled?", I remember going through presentations after presentations, apart from 10Ks and 10Qs, from various E&P managements trying to figure out the exponential drop in well rates but coming frustratingly short of a realistic model. The only thing advertised (apart from the inflated IRRs) were the inflated initial production rates, as if that was a sufficient metric, along with implications that that an entire area/acreage had the exact same IP rate. Decline curve analysis seemed to be an esoteric art. (This was between 2011 and 2016.)
One gigantic rationale that I have highlighted for years, you miss here Arjun but you know it: “greater fool”. As in “you grow and you grow and then you sell it to Exxon”.
Excellent explanation of ‘Shale1.0’. One other thing that was severely lacking during Shale1.0 and might impact 2.0 ROCE is the use of deterministic decision making instead of probabilistic. Subsurface will always have uncertainty. If full-field development decisions are based on ‘EV’ economics without accounting for the downside risk, that could potentially lead to significant over capitalization (and lower ROCE). It’s about maximizing risk-adjusted returns and not simply returns.
Arjun, it must have been very difficult for you to compare your NY Yankees to Shale 1.0. As a Red Sox fan I would note the similarities are very strong, given all the money the Yankees have spent over that period to little avail. Here's to hoping that Yankees management are not reading your posts and taking lessons on how to build a roster.