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- 1. Aging US ShaleWells: Aging US Shale Wells: Aging US Shale Wells: Aging US Shale Wells: Years of Remaining Opportunities or Years of Remaining Opportunities or Years of Remaining Opportunities or Years of Remaining Opportunities or Growing Asset Retirement Growing Asset Retirement Growing Asset Retirement Growing Asset Retirement Obligations? Obligations? Obligations? Obligations? AAPG Women’s Network Luncheon AAPG Women’s Network Luncheon AAPG Women’s Network Luncheon AAPG Women’s Network Luncheon IMAGE 2022 IMAGE 2022 IMAGE 2022 IMAGE 2022 Laura Freeman
- 2. Speaker Speaker Speaker Speaker 2 Laura Freeman Laura Freeman LauraFreeman Laura Freeman is the founder and CEO of Highpoint Global Capital. She has been an integral part of over $5 billion in acquisitions and divestitures including the high-profile acquisition of all of Hunt Oil Company’s Permian Basin Assets in 2021. Laura specializes in technical valuation, financing, and navigating the complexities of dealmaking. She has worked various high tech and ESG projects for clients including $100 million in funding for wind royalties, bitcoin applications for waste gas, ESG planning, and technology use and integration. Laura has a Master’s in Petroleum Engineering, an MBA from UCLA Anderson, and a bachelor’s degree in Physics. She has been featured as an expert on M&A, finance, and Reservoir Engineering for various magazines, industry events, and online publications including Oil and Gas Financial Journal, Society of Petroleum Engineers (SPE), OilPrice.com, PHDWin week, American Association of Petroleum Geologists (AAPG), and Journal of Petroleum Technology (JPT).
- 3. 3 Highpoint Activity Highpoint Activity HighpointActivity Highpoint Activity Founded Highpoint Global Capital over 5 years ago Highpoint is a technically focused advisory firm Faced and challenged many of the largest banks, Private Equity firms, and largest Oil and Gas companies and have won deals Transacted even during down-turns and Covid years Highlights: • Transacted several deals over $20MM • $100MM in funding for a client doing ESG work • Hunt Permian deal for Vencer/Vitol Exciting current projects: • Portfolio management and divestiture timing work • Navajo Nation Oil and Gas
- 4. 4 M&A Perspective M&A Perspective M&APerspective M&A Perspective Warning Warning Warning Warning – – – – not a geology talk! not a geology talk! not a geology talk! not a geology talk! So why are you here? There is a lot of frustration by technical experts at investment decisions There is a lot of frustration by technical experts at investment decisions There is a lot of frustration by technical experts at investment decisions There is a lot of frustration by technical experts at investment decisions • The M&A viewpoint is often not the same as the technical expert viewpoint • The banker or PE view is often (almost always?) not the technical view • Poor decision making without sufficient subsurface and technical understanding led to the destruction of billion of dollars In my opinion the industry has lost it’s way by deviating from sound technical understanding and decision making through the “shale boom” There are a lot of muddy waters around investment decisions – acquisitions and drilling There is high value add for careers, companies, and the industry as a whole There is high value add for careers, companies, and the industry as a whole There is high value add for careers, companies, and the industry as a whole There is high value add for careers, companies, and the industry as a whole when geologists and geoscientists learn more about cross when geologists and geoscientists learn more about cross when geologists and geoscientists learn more about cross when geologists and geoscientists learn more about cross- - - -disciplinary disciplinary disciplinary disciplinary implications and financial decision making implications and financial decision making implications and financial decision making implications and financial decision making
- 5. 5 Low Low Low Low- - - -Rate Wells Background RateWells Background Rate Wells Background Rate Wells Background Buy-side clients looking to acquire conventional assets with “no stripper wells” - oil wells under 15 bopd and gas wells under 90 Mcfpd over 12 months Journal of Petroleum Technology (JPT) editorials Feb 2021 and Feb 2022 Folks knew there were a lot of stripper wells but many were shocked at how many Premise seems simple but there are deep implications especially within the M&A context With an estimated 760,000 stripper wells in the US there is a large P&A or Abandonment, Decommissioning and Restoration (ADR) or Asset Retirement Obligation (ARO) liability that will have to be dealt with at some point There have been some very muddy waters on unconventional well performance over the several years – and there has been massive capital destruction https://nswa.us/stripper-wells/
- 6. 6 High Drama High Drama HighDrama High Drama “I think it misleads the investment community into believing that oil and gas experts are idiots oil and gas experts are idiots oil and gas experts are idiots oil and gas experts are idiots” “Your own statements adequately demonstrate your lack of knowledge concerning decline curve your lack of knowledge concerning decline curve your lack of knowledge concerning decline curve your lack of knowledge concerning decline curve analysis, reservoir engineering, and current shale well economics analysis, reservoir engineering, and current shale well economics analysis, reservoir engineering, and current shale well economics analysis, reservoir engineering, and current shale well economics.” “I have studied these type of examples and can tell you why this analysis is misleading and has no this analysis is misleading and has no this analysis is misleading and has no this analysis is misleading and has no baring baring baring baring on practical resource development. Please reach out if you would like more information and how to clean up this analysis” “Regarding your focus on and romance with ESG investing, you clearly do not understand where the you clearly do not understand where the you clearly do not understand where the you clearly do not understand where the world’s energy comes from world’s energy comes from world’s energy comes from world’s energy comes from” Freeman JPT Feb 2022, Enverus source data, LinkedIn comments Shown on linear scale to highlight the rate changes
- 7. 7 Forecasts Forecasts Forecasts Forecasts Higher IPs havenot generally translated to an upward phase shift in matrix flow or longer fracture flow Freeman JPT Feb 2022, Enverus source data 10 100 1,000 0 12 24 36 48 60 72 84 96 Oil Production Bopd Months on production Comparative Type Curves by Vintage Normalized Type Curves by Year Midland County Wells 2021 2020 2019 2018 2017 2016 2015 - 100 200 300 400 500 600 700 800 900 1,000 0 1 2 3 4 5 6 7 8 9 10 Oil Production Bopd Years on production Schematic of Upward Shifted Curve Conceptual schematic only Linear Log
- 8. 8 Basins Considered Basins Considered BasinsConsidered Basins Considered Bakken Marcellus Haynesville Eagle Ford Delaware Midland
- 9. 9 High Level Look HighLevel Look High Level Look High Level Look Macro-level look for high-level takeaways from an M&A point of view, Eagle Ford example: EIA.gov, EOG investor presentation, Enverus data for heat map
- 10. 10 Major US OilPlays Major US Oil Plays Major US Oil Plays Major US Oil Plays Freeman JPT Feb 2022, Enverus source data Why 50 bopd? Why 50 bopd? Why 50 bopd? Why 50 bopd? Somewhat arbitrary Not as low as stripper well classification Not meant to be an economic limit Rates at which many wells are: • Converging to long-life matrix flow or supposed “terminal decline” • Rates much, much lower than IP and early life Given the above – rates at which economic considerations are much different than new drills Not at the P&A or ADR obligation point which is closer to 5-10 bopd at current strip ~30% of the wells in the study are at or under the stripper well classification of 15 bopd At $100,000 P&A cost that is ~$2B in liability At $30,000 P&A cost ~600MM
- 11. 65% 63% 0% 20% 40% 60% 80% 100% Marcellus Haynesville Percentof Wells in Major US Unconventional Gas Plays Producing 1 MMcfepd or Less (18,323 Total Wells) Percent of Wells in the Play Producing 1 MMcfepd or Less Mcfe 0% 5% 10% 15% 20% 25% 30% Up to 250 Mcfepd 250-500 500-1,000 1 -1.5 MMcfepd 1.5-2 2-2.5 2.5+ Marcellus Production Distribution 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Up to 250 Mcfepd 250-500 500-1,000 1 -1.5 MMcfepd 1.5-2 2-2.5 2.5+ Haynesville Production Distribution 11 Major US Gas Plays Major US Gas Plays Major US Gas Plays Major US Gas Plays Enverus August 2022 The Marcellus and Haynesville have a similar amount of wells under 1Mmcfepd but very different distributions
- 12. 12 Permian Unconventional Permian Unconventional PermianUnconventional Permian Unconventional Freeman JPT Feb 2022, Enverus source data Midland Basin Delaware Basin
- 13. 13 Mature Unconventional Mature Unconventional MatureUnconventional Mature Unconventional Freeman JPT Feb 2022, Enverus source data Eagle Ford Bakken
- 14. 14 Why Does itMatter? Why Does it Matter? Why Does it Matter? Why Does it Matter? • US Unconventional Plays are aging fast • Many HZ wells are moving into matrix type flow after only 3-5 years, with much lower rates • Generally payouts must happen fast or won’t happen at all • After the first 3-5 years there are often issues with economic viability of HZ wells especially in M&A − Fixed OpEx “keep the lights on” (much higher than conventional VT) − Repeat failures and workover costs when a well goes down − Higher rates of terminal decline − Burden of G&A, COPAS, and capital structures (ex aggregator PE firms with high fees) − Limited options on increasing production (ex re-fracs and EOR) Much lower flow rates to support OpEx, well work and capital structure Freeman JPT Feb 2022, Enverus source data
- 15. 15 Sample Well Sample Well SampleWell Sample Well – – – – Single Phase Oil Single Phase Oil Single Phase Oil Single Phase Oil Unconventional well in later- life terminal decline 30 Bopd GROSS as-of 8/1/2022 ~8% exp annual decline 100% WI, 75% NRI $80/bbl with Additional -$3.50 deduct $8,000/well/month OpEx 4.6% Oil Sev Tax, 2.5% AdVal No income taxes No P&A No workovers No company overhead Positive cash flow for ~20 years PHDwin v2 model $3.85 MM non disc CF $2.36 MM PV10
- 16. 16 Oil Well Economics OilWell Economics Oil Well Economics Oil Well Economics - - - - Pricing Pricing Pricing Pricing Scenario (ALL have additional Scenario (ALL have additional Scenario (ALL have additional Scenario (ALL have additional - - - -$2.50 diff) $2.50 diff) $2.50 diff) $2.50 diff) Well PV10 ($M) Well PV10 ($M) Well PV10 ($M) Well PV10 ($M) Well Life (Years) Well Life (Years) Well Life (Years) Well Life (Years) Starting Assumptions $80/bbl $2.36 21.8 8/15/2022 Strip $2.19 20.3* $75 Flat $2.15 21.0 $65 Flat $1.74 19.2 $55 Flat $1.33 17.13 8/15/2022 WTI Strip* 8/15/2022 WTI Strip* 8/15/2022 WTI Strip* 8/15/2022 WTI Strip* Start Month Price Aug 2022 $90.53 Jan 2023 $84.76 Jan 2024 $78.80 Jan 2025 $74.38 *Jan 2026 and on $70.89 • At high oil prices many profitability issues do not “show up” • Lot of “gotchas” when oil price falls again • Does NOT consider hedging • No overhead, return hurdles, cost of capital, capital structure consideration, or fees No overhead, return hurdles, cost of capital, capital structure consideration, or fees No overhead, return hurdles, cost of capital, capital structure consideration, or fees No overhead, return hurdles, cost of capital, capital structure consideration, or fees $30 $40 $50 $60 $70 $80 $90 5-year Average WTI Forward Strip Pricing 5-year strip ave LTM ave Ave -$5 Ave +$5 Forward strip annual 5-year average of CME Financial Futures - CS running monthly average of daily spot, 2 from D Purvis are Spot CL, LTM is Ave of 5-year averages
- 17. 17 Workovers Workovers Workovers Workovers For later-life HZwells the ECL is often when the well goes down and won’t pay out a workover or will take a long time to pay out a workover (increased risk) Year Year Year Year Average Average Average Average Monthly Cash Monthly Cash Monthly Cash Monthly Cash Flow $M Flow $M Flow $M Flow $M Months to pay Months to pay Months to pay Months to pay out $100M out $100M out $100M out $100M workover workover workover workover 2022 31 3.2 2023 29 3.5 2024 26 3.9 2025 23 4.3 2026 21 4.8 2027 18 5.4 2028 16 6.1 2029 14 7.0 2030 13 8.0 2031 11 9.2 2032 9 10.6 2033 8 12.5 2034 7 14.9 2035 6 18.1 2036 4 22.3 2037 3 29.0 2038 3 39.5 2039 2 59.2 2040 1 106.6 2041 0.3 288.3 0 20 40 60 80 100 120 Approx Months to Payout Approximate Time to Payout Approximate Time to Payout Approximate Time to Payout Approximate Time to Payout $100,000 Workover $100,000 Workover $100,000 Workover $100,000 Workover (Sample Well $65/bbl)
- 18. 18 OpEx Example OpEx Example OpExExample OpEx Example 0 50 100 150 200 250 7/1/2019 7/1/2020 7/1/2021 7/1/2022 7/1/2023 Oil Prod Bopd Oil Production $18,940 $11,509 $- $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 7/1/2019 7/1/2020 7/1/2021 7/1/2022 7/1/2023 OpEx $/well/month OpEx Fixed $18,940/month Variable Lender Model 40% less 36 months out Lender cost model: Lender cost model: Lender cost model: Lender cost model: $7,448/well/month fixed Oil variable OpEx $1.71/bbl Gas transportation $1.36/mcf Fixed cost model: Fixed cost model: Fixed cost model: Fixed cost model: LTM LOS Ave excluding 2 high months: $18,940/well/month First 36 months out First 36 months out First 36 months out First 36 months out – – – – variable model is 40% less than fixed variable model is 40% less than fixed variable model is 40% less than fixed variable model is 40% less than fixed Over time the fixed and variable components diverge even further as production gets lower and lower – in reality the OpEx is somewhere in between the models
- 19. 19 Additional Considerations Additional Considerations AdditionalConsiderations Additional Considerations Terminal declines Terminal declines Terminal declines Terminal declines • Seeing many areas where terminal decline is much steeper than originally forecast • Many wells show erratic production and repeat failures with downtime
- 20. 20 Additional Considerations Additional Considerations AdditionalConsiderations Additional Considerations Production Improvement Production Improvement Production Improvement Production Improvement • Mixed re-frac results based on play, operator, prior development, benches, etc • Most would agree the “jury’s still out” • Mineral companies seeing a lot of variation by operator and location in the play, watching attempts in the more mature Bakken and Eagle Ford for what’s to come in the Permian • EOR being done in a few places – for example EOG in the Eagle Ford Financial Considerations for Potential Buyers Financial Considerations for Potential Buyers Financial Considerations for Potential Buyers Financial Considerations for Potential Buyers • Overhead and G&A • Fee structures – example PE running pref rate before hitting waterfall • Return hurdles and cost of capital • Hold and cash flow case is motivating for would be sellers in the high price environment • Buyer-seller gap driven by major divergence in valuations using cash flow, PV, and flowing barrel comps
- 21. 21 P&A Obligations P&A Obligations P&AObligations P&A Obligations ~30% of the wells in the study are at or under the stripper well classification of 15 bopd At $100,000 P&A cost that is ~$2B in liability At $30,000 P&A cost ~600MM With ~760,000 stripper wells in the US even at $30,000 P&A that is ~$23B ~$65,000/well For 760,000 wells $50 Billion! https://www.texastribune.org/2022/08/26/oil-gas-wells-infrastructure-money-texas-railroad-commission/
- 22. 22 Takeaways Takeaways Takeaways Takeaways US Unconventional Playsare aging fast Many HZ wells are moving into matrix type flow after only 3-5 years, with much lower rates At lower commodity prices it becomes much more difficult to operate these wells at a profit, especially when considering full cycle M&A Production improvement has proven difficult (ex re-fracs and EOR) Operational excellence and controlling costs become the driver for profitability (weren’t a focus during the shale boom) As rates continue to drop, there is opportunity for those who can operate lean and make money versus larger operators and financial-type groups Will there be sufficient technical improvements to give these wells a second life or will 10’s of thousands of wells depend on controlling OpEx? How will the geology of an area impact attempts at increasing production? How will M&A evolve considering the maturity of US assets?
- 23. 23 AAPG Women’s Network AAPGWomen’s Network AAPG Women’s Network AAPG Women’s Network Thank you to the AAPG Women’s Network for sponsoring Women are not the only underrepresented group in M&A and O&G Investment Banking • Age – too “young” and “too old” • Race • Technical folks • Others My mentor’s advice, “The world is what you make of it, friend. If it doesn’t fit, you make alterations” Stella in the movie Silverado It’s not pretty and you are going to have to work hard and toughen up to setbacks and criticism Best advice I can give:
- 24. 24 Parting Thought Parting Thought PartingThought Parting Thought Enthusiasm is one of the most powerful engines of success. When you do a thing, do it with all your heart. Put your whole soul into it. Stamp it with your personality. Be active, be energetic, be enthusiastic and faithful and you will accomplish your objective. Nothing great was ever achieved without enthusiasm. - Ralph Waldo Emerson