23 Mar Slow and Steady Time
As you are most likely aware, the market prices for oil and natural gas have gone down in the past few months. With labor and supplies not matching the price decreases, it’s time to take a hard look at 2023 and strategize where $$ can be made in investing in upstream oil and gas.
Short Term: Cost per Barrel
Back in 2017 when prices were REALLY low, Operators who survived got this number down. Chasing wildcats or small drilling programs were put on hold…economics had to be predictable and returns safe in order to keep investors/stockholders satisfied and retain good staff. When 2022 hit, it created the largest profitability across the board the industry has ever seen, in no small part to this discpline!
Short Term: “Deliberate Pace”
I was listening to a podcast of former large cap oil and gas C-levels this week. The quote that stuck out to me on the philosophy one of the panelists believed the Big Boys will adopt is “deliberate pace”. That means no new drilling programs, completing what they already have scheduled if the consumables are already purchased, and keep the employees, well, employed. They also mentioned that it makes no sense to chase new fields/plays as there’s no market advantage to do so. Stockpiles look high and demand is even (for the time being). Expect to see rig counts go down for the next 6 weeks.
Long Term: Natural Gas
Natural gas took a dive on the world market, a great deal due to a rather warm winter. However, the worldwide demand is still there and looks to increase over many years. Can’t burn coal forever! Large and small companies will simply keep PDP or PUDs in the ground for future recovery. It’s not the first time that natural gas has gone through massive price changes, and probably not the last.
So, what to do and expect?
Look at in-field (and better yet, offset) drilling programs only. Stay away from wildcats for now, no matter how enticing they look.
Get to know the Operator’s break-even $$ per barrel/mcf before you invest. The industry on a whole has gotten much better at understanding cost before putting a drill bit into the ground.
Ask about realistic drilling to completion timelines. Chances are good that the schedules may be freed up a little for the smaller plays. Vendors last year serviced big jobs first and, frankly, left a lot of smaller operators stranded.
Start thinking +18-month payouts on new drilling programs and +12-month payouts on re-entries/recompletions for now
If you can find a producing or in-field gas play that has some oil/condensate component that can be produced WITH pipeline access, now’s a good time to look for a sweetheart deal (even if development could take months). Key is check the local demand for product and gas purchaser contracts.
Keep in mind we’re not in “fire sale” mode and I don’t expect the industry to get there this year. I do predict prices going higher in last Spring on both commodities, so it’s a good time to develop IF you can work done in the field. I’ll be presenting a few new programs in the upcoming weeks on programs that match the criteria above.