Literature is filled with cautionary tales that are meant to warn us of the perils of the world as humanity seeks to advance society. Mark Twain said it best with “History Doesn't Repeat Itself, but It Often Rhymes”. Yet many times those that are warned of past defeats venture out thinking 'it will be different this time'.
This was especially true for me as I watched the boom and bust cycles in the Permian Basin over the course of nearly two decades. I remember being a vendor and watching Fractech(FTSI) hire hundreds of people and purchase nearly 200 Mack trucks or Valarus panicking over lack of welders and recruiting 80 skilled workers in one hiring spree through Puerto Rico to cut costs. Articles flooded the local news paper of shortages of employees and famed economist Ray Perryman had the ears of members of the Petroleum Club as he mentioned $200 oil in early 2008 near the top. Hundreds of stories of oil related companies ramping up hard in 2008-2012 to find a short cycle soon after and prices crashing.
"Lord, please grant me one more oil boom, I promise not to piss it away!" Was a common bumper sticker in the bust of the 1980's and had it's revival again in the bust of most recent decade. 40 years is a long time and people tend to forget quickly as a new generation comes in but these last 3 busts with COVID-19 on top has left the oil and gas sector cautious on chasing promised growth on low tier wells. Capital discipline is echoed by CEO's of most majors with a focus on returning capital to investors but the world is a tricky vixen where it's constantly hungry for more and more energy to sustain a lifestyle we have all become accustomed to.
Bankruptcies piling up on the US Shale players grew to extreme heights of nearly 300 companies from 2016 on as shown by Haynes Boone who track these events. Between 2007-2018 roughly $700B was lost on chasing high growth wells in the US which led to a decade long abundance of cheap energy for the world. A mistake repeated over these short cycles that has finally come to a head where investors are demanding a return on capital instead of subsidizing the world. Emerging markets with high population continue to look towards energy as a way to bring their economic structure to the forefront of modern society and in the growth of these nations leads to more growth for all energy, but at what cost? J.P. Morgan estimated that a need of $600B more than previous decade just to maintain supply vs demand.
Growth in energy is never linear but contraction is historically short lived where demand fell only in 9 of the last 55 years. Data adds to confidence that the world is not willing to give up luxury in the face of rising prices of energy.
New technologies in horizontal drilling of the shale oil patch led to massive volumes in production growth but at a cost of harmonic decline curves where a steep decline happens after initial production.
This increased the incentive of inflated numbers coming from geological reports to be presented in a fashion that made investors believe that production volume would eventually outweigh high costs. Instead chasing the potential of exponential growth at any cost caused a flood of barrels to the market and supply began to overshadow demand. This also lead to an increase in the process of drilling but not completing new wells during downtimes in oil price structure on a bet that a well could be completed in an up-cycle and capture the initial high production volume of these harmonic decline wells. Drilled but Uncompleted (DUC) tracked by the EIA have shown a decline since 2020 even with rig count increasing in 2022 As these inventories of DUC's get tighter production will remain flat without the high swing shale growth from horizontal wells.
The US has become the swing producer of the world thanks to quick turn development that takes months instead of years to bring online. However, a need to reprice energy is required as investors are typically not in the business of losing money and are learning from recent past mistakes. With casing, sand, logistics, other materials, and workforce inflationary pressures on the industry setting a base case for cost to market, a premium to continue the high growth of production to meet demand needs to be priced in. The livelihood of a company to avoid bankruptcy based on market timing isn't sustainable for any industry but is a guaranteed point of failure for the oil gas operating on such tight net margins.
As I sit in the Permian Basin writing this, I can confidently say that oil and gas companies are not treating this as a boom of recent memory and will not "piss it away". This begs the question: what is the world willing to pay for energy to continue growing and incentivizes companies that prop up prosperity and add to the comfort of modern world? Apparently in Europe that's $600 for an equivalency of a barrel of oil in natural gas.
Well done, Broncho.