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Raymond James Energy Stat of the Week
by J. Marshall Adkins

Energy Stat: Analyzing Oil Price Breakevens - Can Anyone Make Money at Sub-$40/Bbl?
March 28, 2016

Amid the oil price meltdown, oil producers across the spectrum - large and small, onshore and offshore, and from virtually all geographies - have sharply curtailed drilling activity. Most of these curtailments are a function of cash flow constraints: i.e., companies would like to drill more but they don't have the cash. Also, the current oil price environment has rendered many areas simply uneconomic. In this Stat, we will take a look at the most recent oilfield break-even economics both in the U.S. and internationally. Any such oilfield breakeven analysis comes with a several big caveats: 1) there is often a high degree of return variability even within the same geographic area, 2) everyone defines oilfield "breakevens" differently - our U.S. analysis is for the next well drilled, NOT full cycle returns, 3) Our international breakeven analysis includes more fixed costs because they are typically larger, long lead time projects rather than individual wells, 4) breakevens are falling rapidly in today's low price oil world, and 5) In the U.S., cash flows are more important for drilling activity than breakeven returns. With that being said, we estimate that 13 (or over 70%) of the 18 U.S. plays we analyzed can generate a pre-tax IRR of at least 15% at less than $50/Bbl WTI while only one (or 10%) of international areas we analyzed work at less than $50. Instead, eight (or 80%) of the ten international areas in our analysis currently need $50 to $70/Bbl Brent to generate adequate returns. Given that $30/Bbl oil prices do not generate acceptable economics just about anywhere aside from select areas in the Permian Basin, SCOOP/STACK, and (with less clarity) onshore Russia and the Persian Gulf, the oil price environment will eventually have to recover to support a more sustainable level of industrywide investment.