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13 Pages

When will tight oil make money?

When will tight oil make money?

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. 

What's included?

This report includes 1 file(s)

  • When will tight oil make money? PDF - 371.47 KB 13 Pages, 1 Tables, 16 Figures


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  • 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

In this report there are 17 tables or charts, including:

  • Executive Summary
  • 1. Is it really different this time?
    • 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
  • 2. Tight oil sensitivity to price, costs, productivity and behaviour
    • 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
    • Evolution of oil IP rates
    • Evolution of drilling speed
    • Share-price performance
    • Evolution of gearing ratio
    • When will tight oil make money?: Table 1
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