Conventional Discovery Shortfall Demands Well Diversity

Conventional Discovery Shortfall Demands Well Diversity
"Conventional wells not being drilled now won't be producing later on."

Watching the story unfold and waiting, “just like a tiger stalking its prey,” were the major operating companies, McNulty added. He observed that the strategy of seeking quick returns from unconventional projects worked fine for smaller players early on – until commodity prices collapsed in the middle of the current decade. To be sure, he added that some small players managed to avoid the “bloodshed” that ensued.

“I think it’s important to differentiate between what ‘Wall Street’ means and what local private capital means,” McNulty said. “I am well aware of several private capital firms that are here in Houston, and in other locations that are not spelled ‘New York,’ that have done very well and have made very smart investments. And, in many other cases, lots of debt became, or will become, call options on cheap equity.”

Then there are the larger exploration and production companies.

“The big majors are entering the unconventional plays with their big balance sheets,” McNulty noted. “The big independents that have managed the right-hand side of their balance sheets well will survive and make acquisitions. The smaller players will survive if they managed their debt well and might be acquired at decent pricing. The smaller players that are over-leveraged will need to go away for good.”

McNulty added that larger, more diversified companies can overcome the large depletion rate disparity between unconventional and conventional oil wells if they manage both types of assets properly.

“The same concepts that we use in portfolio management can be used to diversify timing risk across a package of unconventional oil wells and conventional oil wells,” he explained. “A much better job needs to be done matching the capital structures to the timing of the producing cash flows with potentially weaker prices.”

McNulty also anticipates that conventional projects will increasingly dot the oil and gas development landscape – but not to explicitly counter the instant gratification mindset that has prevailed in the past decade.

“I have had several meetings recently with private companies that are actively working on conventional projects,” he said. “However, I do think that the theme is more about scale and smart capital structures.”

Because larger companies are big, they will more likely include conventional drilling programs in their portfolios, he explained.

“They operate in more places and, in my opinion, will look at both conventional plays and unconventional plays,” he concluded. “I do not agree with the notion that you have to pick one over the other. It will happen as a by-product of consolidation, portfolio diversification and a lower commodity price environment. Lots of debt needs to become equity. Lots of companies need to merge or go away.”

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B.W.  |  October 25, 2019
Typical oil and gas industry greed. Yhey wonder why they have short falls in people wanting to get into the industry. Boom and bust. Up and down. It falls on the shoulders of CEO's caring about nothing but profit. We have a glit of natural gas. Were still flaring it! Companies 20 years ago should of been promoting the resource. Oil and gas companies do a horrible job on flattening the boom n bust cycles. Horrible job on educating general public on how new fracking techniques and well casing procedures are safe on environment. It all goes back to greedy CEO's, profit and public traded companies being ran by board members few if any whom have been in the field caring about a good steady industry. Totally profit driven. I would not recommend this career to anyone now days.
David Carlson  |  October 22, 2019
His conclusion about the death of convention comes across as fait accompli. However, an admission is made that the strong shale investment requires support of access to easy money. It must be sustained by easy money for fifty years as well for he conclusion to ring true. When has that trend been sustained? If only the majors and a few midsize outfits can make it work now...the future is not guaranteed. Too little in this romance has ever been stressed about profitability. Unless the country goes Socialist, this point will force its way to preeminence, eventually.