Insight
When will tight oil make money?
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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.
Table of contents
- Executive Summary
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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
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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:
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Free cash flow: historicalReturn on capital employed: historicalFree cash flow outlook for Tight Oil Inc.
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IRRs versus capital expenditure on new projects for our coverageEOG’s cash flow under different scenariosEOG’s production under different scenariosWM reserves lifeGlobal undeveloped oil reserves by Brent breakeven price (NPV, 15): US tight oil vs greenfield conventionalTight Oil Inc.: sensitivity of value to price, discount rate, productivity, and costPortfolio value sensitivity to oil price: Tight Oil Inc versus Non-tight-oil peer groupSensitivity 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)...
What's included
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