It’s not our obligation to lose money

The point of a business is to make money.  Full stop.  At least, if you are a private, family owned company, that’s what you do.  The big public companies… I’m not so sure anymore.  But, given that base goal, today I address the following question: “If U.S. E&P’s stop shrink production and let supply-demand dynamics drive prices higher so that our marginal U.S. barrel is economic, isn’t that anti-trust/cartel like?”  No.  No, it’s not.  Here’s why.

Exhibit A.  We don’t make money.  Sure, some of the $342 billion will cash flow over the next 30 years but on a year over year basis, we haven’t been cash flow positive as an industry… basically ever.  Moreover, 2014 marked a significant change in the required cost structure of assets, with many Eagleford and Bakken positions assembled in 2012-2014 significantly underwater today.

Net Cash flow per year for U.S. Shale companies

Exhibit B.  All that money was growth, not profitability.  The $342 billion of SURPLUS investment in the above chart led to the production growth in the below chart and, over the course of those 10 years, provided 80% of the volume growth in the world since 2010.  As demand increased, supply increased leaving price the same.  Had growth been half… or less, prices would be higher and debts would be lower.

Horizontal Shale Wells in the US since 2010

 

World Oil Demand

 

Over the 10 year period of 2010 – 2020, U.S. shale producers produced 14.6 billion incremental barrels for the $342 billion, equating to roughly $23/bbl* more in investment than revenue.

The point?  Our industry has been massively subsidizing the global consumer in a money losing proposition for a very long time.  For the industry to have been cash flow positive during that 10 year stretch, the average price would have needed to be $92.47/bbl ($23/bbl higher than the actual average of $69.47).

So, no.  If oil and gas companies all stop growing production, use all cash flow to pay back debt, shrink production another 2 mmbo/d through natural declines, widen spacing, drill less wells and stop subsidizing the consumer, it’s not a cartel.  It’s not collusion.  And it’s not anti-trust.  It’s just good business.  On the other hand, Amazon, Google and Apple taking down Parler and investment banks forcing the WallStreetBets Reddit site to become private because retail investors are sticking it to hedge funds…. that’s another story.

The bottom line.  Exxon produces barely more than 2% of the world’s total oil on a daily basis whereas Google gets north of 91% of search.  You be the judge.

 

* for simplifying purposes, I assumed that the 25% royalty is effectively covered by base production coming in to arrive at the $23/bbl.