Hasty generalisations and shale…

The being without an opinion is so painful to human nature that most people will leap to a hasty opinion rather than undergo it.

Walter Bagehot

John Dizzard in the FT this week spoke to a man from Oaklahoma and decided that the whole shale sector was just the result of market liquidity pumping money into the small debt financed E&P companies. Dizard suggests capital markets are “subsidising” the sector. This appears to have been a hasty generalisation… The data point appears to be based on Drilled-But-Uncompleted wells:

As one Oklahoma oil and gas man I know says: “There is still unlimited capital, and as long as that is true, you can grow anything. If the companies had been forced to live within their cash flow, then their production would go down. Then they would have run into a death spiral where nobody would want to invest in them.” The shale companies struggling with sub-$40 or sub-$50 oil prices were also able to live off the excess inventory of drilled-but-uncompleted (DUC) wells that had built up during the boom years.

As our Oklahoman says: “There were thousands of DUCs that had not been taken account of. The companies could just complete and connect those to offset the declines in production from older wells.”

The problem is I don’t see this:

DUC 17

Source: EIA, Baker Hughes, Jeffries

First of all we had the meme that shale was too expensive on a per unit basis, and now we have the meme that actually it is only possible because high-yield investors don’t understand what they are buying and funding. Admittedly HY doesn’t always get it right, as offshore bonds currently show, but to suggest that shale is solely the result of a capital misallocation is surely mistaken?

US capital markets are probably the most efficient in the world at adapting. The various restructurings happening in offshore (Paragon, Tidewater etc) highlight that banks and investors take the writedowns and move on. They are also efficient at funding companies for long periods prior to cash flow break even (Uber being the most notorious example). Shale is here to say it is only a question of how big it is.

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