Kemp: Free Cash Flow Says Little About The Future Of Shale


John Kemp is a Reuters market analyst. The views expressed are his own

LONDON, Aug 28 (Reuters) - The independent companies at the forefront of the U.S. shale boom will finally earn enough from selling oil and gas to cover their capital expenditures next year, for the first time since 2008.

Free cash flow, which measures operating cash flow minus capital spending, for the 25 leading independent oil and gas producers is expected to show a surplus of $2.4 billion in 2015, according to a consensus forecast in the Financial Times.

That compares with a shortfall of around $9 billion in 2013 and $32 billion in 2012. ("Shale oil and gas producers' finances lift growth hopes" FT, Aug 27)

During the years of negative free cash flow, independents relied on equity issues, borrowing and asset sales to sustain their drilling programmes. That led some analysts to conclude the shale boom was unsustainable or even liken it to a Ponzi scheme, which will collapse when fresh capital inflows cease.

"It is not clear that the U.S. independents are profitable," Steven Kopits, managing director of Princeton Energy Advisers, wrote recently for Platts. "An industry can see a boom irrespective of profits or free cash flow if banks and investors are willing to underwrite the promises of future profits. The Internet bubble showed us that" ("Hamilton has it right on oil" July 30).

"What is not clear (is whether) the industry (both large players and independents) can run a cash-flow positive business in both top-quality and in more marginal plays and whether the positive cash flow could be maintained when the industry scales up its operations," Ivan Sandrea wrote in another sceptical piece for the Oxford Institute of Energy Studies. ("U.S. shale gas and tight oil industry performance" March 2014)


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Conrad Maher | Aug. 30, 2014
Nothing new in this article. What is missing in the shale/source rock is the data to determine if the play can be profitable over the long term or if it will be like the high stakes gamblers in the casino. Some big winners, but the house knows what percentage they will win and how much all gamblers must lose to pay off those big winners and a profit to the casino. With enough data from enough wells in different basins we will be able to determine if the companies eventually face gamblers ruin or if enough new drilling locations can be found which will the oil and gas to pay for all the investments and return a profit to the gamblers. Not just some of the gamblers, but enough to pay for all the investment in the shale play. The best prospects are drilled first by each operator. Some operators have better prospects and they are more likely to avoid gamblers ruin and even make considerable profit and an acceptable return which covers the risk.. We know too little about the economics of the shale play to know if those profits and the return will cover all of the investment in the play. As fewer better prospects become available, operators will be forced to drill the poorer prospects and as the ultimate recovery per well falls, more and more wells will be required to maintain production levels and fulfill contracts for delivery. With many years of experience in exploration, appraisal and field development and production of conventional reservoirs, the most interesting consequence of the shale play is the renewed interest in formations with poor reservoir parameters and low flow properties. Many old fields are being redeveloped with improved techniques and the oil and gas is being produced at a profit with the use of existing infrastructure. The US is still importing just under ten million barrels per day of crude oil and oil products. The biggest oil field in the world can still produce nearly as much oil per day as the 8,600,000 b/d the US produces from all of its more than 1,100,000 active wells. That is less than 10 b/d per active well.


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