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.)
Thank you Isac. It's tough to have a per well model without using firms like Enverus or IHS, etc., or, on your own, trying to replicate their per well databases based on publicly available state data. For me, the disconnect between well IRRs and corporate level financials revealed the crazy disconnect between promises and actual performance.
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”.
Paul, nice to see you here. The "Exxon's going to acquire you" angle always seemed like a Street analyst concoction to me. I always thought it was over-stated and I don't think was a driving factor behind why the bulk of E&P managements over-emphasized growth over returns.
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.
Paul, the truth is the truth. It was an unsuccessful Shale 1.0 era for my Yankees. I would argue they were more successful than E&Ps in that they made the playoffs almost every year and fielded a competitive that was much better than a 0.7% ROCE equivalent. You could argue, though, that the societal benefit to shale is more important than the entertainment value the Yankees provide (to all baseball fans, not just Yankees fans...as a Red Sox fans, Yanks-Sox are always exciting games as an example).
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.)
Thank you Isac. It's tough to have a per well model without using firms like Enverus or IHS, etc., or, on your own, trying to replicate their per well databases based on publicly available state data. For me, the disconnect between well IRRs and corporate level financials revealed the crazy disconnect between promises and actual performance.
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”.
Paul, nice to see you here. The "Exxon's going to acquire you" angle always seemed like a Street analyst concoction to me. I always thought it was over-stated and I don't think was a driving factor behind why the bulk of E&P managements over-emphasized growth over returns.
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.
Thank Jitendra. It's an excellent point. As a Wall Street analyst I would say "scenario analysis" over "point estimates". Same concept.
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.
Paul, the truth is the truth. It was an unsuccessful Shale 1.0 era for my Yankees. I would argue they were more successful than E&Ps in that they made the playoffs almost every year and fielded a competitive that was much better than a 0.7% ROCE equivalent. You could argue, though, that the societal benefit to shale is more important than the entertainment value the Yankees provide (to all baseball fans, not just Yankees fans...as a Red Sox fans, Yanks-Sox are always exciting games as an example).