When will tight oil make money? Report

Insight 26 July 2017

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Report summary

For sceptics, there are big, unanswered questions about tight oil. Chief among these are that tight oil has failed to generate adequate cash flow, profits and returns; that the technical challenge is oversimplified and production targets are overly optimistic; and that management is incentivised to favour growth over value. Our view is more sanguine, a reflection of our base case for tight oil, built on play-by-play and company-by-company analysis. We calculate that the five leading tight-oil specialists will start to deliver significant positive free cash flow in three years time, based on our US$66/bbl Brent (US$63/bbl WTI) oil price assumption for 2020. But there are many risks. Tight oil is highly sensitive to oil price. The extent of sweet spots and the future evolution of well recovery and productivity are also critical unknowns. The myopia of a sector focused on growth could also threaten cash generation and value.

Executive Summary
1. Is it really different this time?
- Reported cash flow, profits and returns have been elusive
- Free cash flow will come as tight oil moves through the cycle
- Sizing up tight oil – the Permian dominates the opportunity
2. Tight oil sensitivity to price, costs, productivity and behaviour
- Corporate cash flow and valuation are leveraged to oil price

Tables and charts

This report includes the following images and tables:

Free cash flow: historical
Return on capital employed: historical
Free cash flow outlook for Tight Oil Inc.

IRRs versus capital expenditure on new projects for our coverage
EOG’s cash flow under different scenarios
EOG’s production under different scenarios
WM reserves life
Global undeveloped oil reserves by Brent breakeven price (NPV, 15): US tight oil vs greenfield conventional
Tight Oil Inc.: sensitivity of value to price, discount rate, productivity, and cost
Portfolio value sensitivity to oil price: Tight Oil Inc versus Non-tight-oil peer group
Sensitivity if Permian tight volumes to cost inflation under cash flow neutrality (US$50/bbl real)
Sensitivity of Permian well returns to cost inflation
5 more item(s)...