Thursday, April 2, 2015

Shale Oil's Burst-In-Progress Is Due To The Treadmill Dynamics

This article was first published by Seeking Alpha on March 30, 2015.

By Sarfaraz A. Khan

Several shale producers have grown rapidly over the last decade, due to the healthy pricing environment and availability of capital. These companies spent billions in unlocking the United States' vast tight oil resources and played a key role in making this nation the world's biggest oil producer, ahead of Saudi Arabia and Russia. However, some of these producers have also taken a lot of debt to drill new wells, and the stock of these companies felt the brunt of the oil price collapse.

Take, SandRidge Energy (NYSE:SD), for instance which carries the twin evils of a highly levered balance sheet and a poor performing asset (Mississippi Lime). SandRidge has fallen by 60% over the last six months, even though the company has significant hedges in place for 2015. Similarly, the shares of Goodrich Petroleum (NYSE:GDP), which also has a weak balance sheet and significant exposure to Tuscaloosa Marine Shale, one of the least economical shale plays in the U.S, have fallen by nearly 79% over the last six months. Other E&P stocks with similar problems, such as Approach Resources (NASDAQ:AREX), Exco Resources (NYSE:XCO) and Halcon Resources (NYSE:HK) have all plunged by more than 50% in the corresponding period.

Part of the reason why producers took on debt is the peculiar nature of unconventional wells; specifically, their decline rates. Oil and gas well typically produce the highest level of output during the first 24 hours of production. Subsequently, the reservoir pressure falls and the ….. read full article at Seeking Alpha