Latest reports from the big Bakken shale producers are proving where we are in the crude bust cycle we’ve been following and trying to time. Both Continental Resources (CLR) and Whiting Petroleum (WLL) reported that they’ll not frack another new well for 2016, a major indicator of how close we’re getting to the bottom in oil prices and the bottom in oil stocks.
My outline for this oil bust cycle laid out in my book continues to hold true, and we’ve been waiting for a real decline in U.S. production (as well as Canadian and offshore) to tell us when the huge glut in domestic oil supplies will finally retreat, and we can get more aggressive in buying oil stocks. As inevitable as that retreat has seemed to me, it’s also been painfully slow – and helped to drop oil prices twice unexpectedly under $30 a barrel.
Continental and Whiting’s decision to cease fracking new wells has confirmed some facts that we’ve known about this bust but that haven’t been universally acknowledged yet. First, ridiculously low breakeven numbers that have been touted by many shale producers and analysts have been just smoke – These are the two most prolific Bakken shale players with the choicest acreage admitting that a profit can no longer be made with oil at $30 a barrel. But it also affirms the accompanying nonsense of these shale players – even the best of them – to continue to increase production through the year merely with efficiency gains.
Nah – Now, both of these Bakken giants have reported big cuts in production targets for 2016. They’ve done it slowly, because they know how deadly it is to share price to admit deeply production will drop with the 73 percent and 80 percent capex slashes that Continental and Whiting are making, respectively. Continental is claiming a 10 percent drop for 2016 and Whiting a more realistic 21 percent drop. Both will turn out to be monumentally low estimates, I believe, once this year sees its end.
Let’s go one further and call out the strategy of “Drilled but Uncompleted Wells” (DUC’s). It is also common wisdom that these represent almost instant production taps, ready to put on-line quickly if and when prices increase – they are not. Firstly, these wells still require almost 2/3 of their total costs to frack to completion. Secondly, who will lend these firms that money to drill even when oil prices do recover?…