ABSTRACT
Authors note: go straight to TD of this tread, to the float shoe, for the conclusion if you are not interested in the details.
This will be an in-progress thread until I draw the conclusions from my study I need and at that time I will open the entire thread to comments. I intend to show you that given the current U.S. shale oil sector's debt load, and its future plugging and decommissioning liability, its actual "all-in corporate breakeven price [Rystad]" is an estimated $20-$25 per incremental barrel of oil higher than reported.
I contend that if servicing long term debt and the payment of dividends to investors are "all-in" considerations in the breakeven calculation, and they are, of course, then so is the actual payment of debt and plugging/decomissioning costs. Those are liabilities of the shale oil extraction corporation/company and every barrel of oil produced from the well inventory of that corpration bares the financial burden of those liabilities. Only when total indebtedness and liabilities are considered is the true breakeven price known. The analyst, or data sell company cannot pick some costs, and omit others.
Shale Oil Debt
I looked at 15 of the top producing shale oil corporations in the Permian Basin, two in the Eagle Ford, two in the Williston and one in the DJ Basin and reviewed their 2024 SEC 10K's to determine long term debt.
I don't consider net debt after cash on hand is considered; debt is debt. If there is sufficient cash on hand to reduce debt it would be reduced as I can make a good argument that the weighed average interest rate now being paid by shale oil companies on debt is more than there rates of return on capital invested. A lender doesn't care about cash on hand, it only cares about what it is owed (and whether there is enough assets to cover the loan.)
A word about long term debt for large integrated major corporations like Exxon, Oxy, Conoco, Chevron, etc.: not all of their reported long term debt is burdened by the shale oil they produce. They have other sources of income, for instance from refinery margins and retail gasoline sales, to pay down debt. The reader may then discout some of those corporation's long term debt from this discussion. Having said that I ask you to remember that Oxy paid $55 B for Anadarko and Exxon $65 B for Pioneer.
My SEC research pretty much matched this Goldman Sachs chart, below, published a few months ago for the end of 2024. So, I am using Goldman data with my additions. I did not include shale gas producers operating primarily in shale gas basins and/or plays like the Appalachian or the Haynesville. Both EQT and Comstock, for instance, operate in the Permian Basin; I left them out nevertheless.
I added the debt from nine other shale oil companies in the footnotes, went thru Novi's current list of American shale oil producers and found what I believe to be almost $18 B of additional long term debt. These are all public companies and this total debt does not include private debt, which I have no way of knowing about. Continental Resources, for instance, which before it went private had something like $6B of long term debt.
Conoco is the only corporation that deleveraged meaningfully in 2024. Bloomberg and Reuters are both on record as suggesting many public shale oil companies are adding new debt to pay dividends to investors. 2023 and 2024 mergers and acquisitions cost money and if they are all stock trades, existing shareholders are effectively diluted. I did not include any of that stuff, or reserve write downs, just money owed lenders.
NOT ROCKET SCIENCE
Diamondback claims to have 1.1 B barrels of PDP reserves. At its current oil production volumes that is PDP reserve to production ratio of 6 years. Color me skeptical. If it DOES have 1.1 G BO of PDP reserves to pay back its $12.9 B of long term debt, that will cost the company $11 bucks per BO. Right now, at $62 WTI NYMEX, it's making no profit per BO after dividends, stock buybacks, interest on long term debt, etc. etc. RI deducts, G&A, taxes, OPEX and marketing, transportation costs from gross NYMEX costs...as per Rystad. Its living on natural gas at NGL's then, which in 2024 represented 10% of its revenue stream at 8o cents an MCF.
Somebody needs to explain to me how this is going to work with prices below $60. Are these dudes just going to hang on for dear life, getting deeper in debt, hoping for higher oil prices? Waiting for Trump's term to be over? Its already borrowing more money to pay dividends.
This info is all available thru SEC filings. I am not trying to tell you not to invest in these guys; knock yourself out. I just wonder how the 3rd largest, or second largest shale oil producer in the Permian is going to survive, thats all.
Heres the only prediction you will hear me make, most likely....these guys will be bought out in less than 2 years. Thats they're lay me down prayers, every night, promise.
Same for U.S. shale oil. Anybody who says differently is ignoring $178 B on long term debt and another $33 B of plugging and decomissioning costs, at least. Why would you chose to ignore that? If the KSA relies on its oil revenue for social costs, why doesn't the shale oil sector rely on its reveune to pay its debt back. What is it, exactly, about America that relies so heavily on debt and then essentially walks away from that debt like it is nothing? Is that "socially" acceptable in our great nation?
Must be, really. The shale oil sector has already lost/bankrupted out on over $400B...more that Saudi Arabia's current entire national debt.
Ours in the U.S. is what...$41T with the signing of the big new beautiful bill?
This is a very thorough, honest appraisal of a calamity coming right at us. Good work!
The Breakeven Metric
Breakeven oil prices was a clever scheme created by the shale oil industry in 2015 and 2016 and its use in analysis and by the main stream media has now reached epic proportions. It was designed to suggest that the difference in costs and product prices was all profit; if costs are $50 and the price is $75, buy shares of stock in Shale R Us, LLC and you, the investor, will become wealthy.
By its very definition, however, breakeven is qualatative and confusing, depending on the analyst. Go to ten different sources on the internet today and you will get 10 different breakeven price estimates. Costs are left out all the time, definitions changed; other costs are moved over into Non-GAPP columns on the spread sheet that I've never heard of before, Some analysts and data-sell companies determine breakeven on a half cycle basis, others pick the necessary price of oil to reach payout in two years, still others a price that will deliver an imaginary internal rate of return (IRR). Today breakeven prices range from $35 per incremental barrel to $65 depending on basin.
Because gassy tight oil wells are fast becomming oily tight gas wells, many sector cheerleaders believe the economic analysis is incomplete if natural gas and natural gas liquids are not used. But, nobody uses gas and NGL's in the breakeven metric. Nobody. Its too damn complicated.
Some gas and NGL prices are reported in SEC filings on a hedged basis, then to dig out the cost of the hedges is a nightmare. Some companies strip their own gas, others send it downstream on a MMBTU sales basis. Everybody uses BOE, at a 6 MCF to 1 BO ratio, but who cares about BTU content when you are working on well economics? Gas prices paid operators is all over the map depending on basin and how much volume space the operator has pre-paid for in the takeaway line. Exxon can get 200% more for its natural gas than Diamondback, in the same basin. It did, in fact, in 2024. Gas is flared, some Lessors require RI be paid on flared gas, others don't. Compression stations are built, gas treated for H2S, or CO2, hydraded, dehydraded, scrubbed and sweetened, all in massive facilities that get built by the operator, whose costs then just disappear into the accounting unknown.
If you wish to use natural gas and NGL's in your breakeven price estimate, good luck. Try to include all costs involved, even those that are depreciated and moved into "sunk" catagories, whatever the hell that means, but don't forget if they are sunk they are over in the long term debt column. And if you are analzing Permian wells, and ties to Waha postings, for God's sake use 60,70, even 80MCF to 1 BO ratios, not 6 to 1.
In 2024 FANG had $10B of gross oil revenue, about, and at less than 80 cents an MCF for the year (SEC 10K), its gross gas revenue was $1B, or 10% of its revenue stream. I believe, except for Exxon, Chevron, Oxy and maybe Conoco, natgas and natgas liquids is a non economic issue at the moment. Its still considered a waste of oil production. Make up your own mind. In the mean time find us a analyst who actually uses gas in the breakeven estimate. Please.
Rystad Breakevens; April 2025
This breakeven estimate is as close to correct as I have yet to see because it includes dividend expense per BO and interest expense per BO on long term debt. Nobody previously has used these "corporate" costs in determing breakeven, not that I am aware of. Or few. This estimate is based on gross barrels of oil produced, not net barrels after royalty deductions, as it should be. The barrel produced bares the burden of royalty delivered free and clear of all costs. Dividends are now a cost of doing business for public shale companies; they have to be paid from production revenue, just like interest on debt. The barrel of oil produced is the only true source of revenue to pay these costs besides gas, If natural gas was $5 an MCF I would feel differently.
Rystad offers no explanation for its categories in the chart above. Wellhead costs I believe include royalty costs per BO, OPEX and production and property taxes. I think $32,50 is short $4.50 per barrel, actually. Overhead, dividend and interest expense I am good with. I don't believe in discounting the future revenue stream (PV18) when 82% of total revenue is recovered in the first 32 months of production life. I'd leave the discount rate out, add the same $4.50 back into wellhead costs and the number is still $62.50. [1] [2] [3] [4] [5]
Update: 5.16.25: Rystad's "dividend costs" include stock buybacks, I now believe; some $43 B of stock buybacks between the big six in the Permian, including FANG and Devon. [6]
As I have previously mentioned these Rystad breakeven estimates are NOT full cycle, "all-in" corporate costs. All in should include paying long term debt back, and plugging and decommissioning all well inventory. Those are liabilities to the company that have to be paid from its producing wells. That is the point in this thread.
[1] Please note this Rystad estimate does not include natural gas and/or natural gas liquids.
[2] Federal income taxes are normally a continuous cost in the normal scope of business but most pure (non-integrated) shale oil companies have years, and hundreds of millions of dollars of tax losss carryforwards.
[3] All oil produced by a company, regardless of age, or volumes, carrys the same corporate cost burdens. I am therefore adamantly oppose to their being two different breakevens, one for new drilled wells, one for old legacy wells. That does not make any sense to me; it is confusing. Shale oil wells, generally speaking, produce the same EURs per producing bench, in their respective producing basins, +/-12%. If you want to know how much profit a Wolfcamp A well in Martin County might make at a fixed price, take the difference in breakeven and product price and divide by well costs. If the well is going to make 100K BO over D&C costs, multiply that time net back, or profit per BO and one can determine ROI. That is the way it was done before the shale phenomena.
[4] WTI closed 5.15.25 at $61.70, LESS than Rystad's corporate, full cycle breakeven. If that price remained fixed, theoretically then if you drill a $10MM Wolfcamp well you will make no profit, regardless of how much its EUR is. If one borrowed money to drill that well, or deferred deleveraging long term debt to drill that well, and are paying 5.25% interest on the indebtedness, its a piss poor business decision.
[5] "Hope" for prices going above breakeven before one's $10MM Wolfcamp well depletes 82% is not much of a plan. Particularly under THIS presidential administration.
[6] Thats approximtely $43B that would not otherwise been used to retire $119B of debt owed by the same six companies. How smart this is will be determined pretty quickly with oil priced below theoretical breakeven. I estimate the U.S. shale oil sector pays close to $10 B per year in intrest on long term debt, or $2.92 per incremental BO (Rystad).