Blog October 18, 2016

As Q3 results soon rollout, with many first looks toward 2017, we are reminded of the longer term value proposition: namely that capital can be invested with returns above the marginal cost of debt. Genscape currently analyzes over 250 individual company play breakevens, defined as NPV > 0 at 10 percent cost of capital, covering substantially all of the United States horizontal drilling. In the Permian, we cover 24 companies and 42 company plays, and find an average breakeven of $36-$39.

The horizontal rig count in the Permian has rebounded 49 percent from its May low adding 57 rigs (now down 51 percent verses year ending 2014), while the Eagle Ford has only recovered two rigs (now down 84 percent from year ending 2014). This does not come as much of a surprise to us, as the Permian has been a magnet for M&A activity this year – over eight billion dollars in deal value during Q3 alone, driven by relatively low breakevens, a diverse set of operators, and a deep inventory of future drilling locations. 

Horizontal Rigs since 1/1/2015

Turning to the financials of Permian companies, over the past 10 quarters, the market has punished those whose debt increased relative to production levels. Companies that have grown production and kept debt down have been rewarded. Diamondback, Callon, and RSP Permian, have demonstrated the ability to improve debt and production metrics, which unsurprisingly rank favorably in our economics report verses many of their peers.

Debt per boe-d over time vs equity performance

Oil prices have ticked significantly higher in the past couple of weeks on hopes that OPEC will announce a production cut at next month’s meeting. With the Q3 earnings season on the horizon, we expect announcements of companies putting even more rigs back to work. Now this clearly does not mean every company will benefit to the same degree as the range of breakeven prices and well results are disparate, and even in the Permian there are some company type curves that do not breakeven until reaching $60 or more.

Genscape's Equity Insight includes a comprehensive breakeven report updated on a quarterly basis which covers every active unconventional play in the Lower 48 and is based on over 200 distinct company specific type curves. In addition, Equity Insight tracks both actualized and forward guidance for both CAPEX and production volumes of over 70 E&P companies who are active in the Lower 48. Our E&P coverage universe represents essentially all publicly traded names. Genscape's Equity Insight also tracks daily volumes by company by region for 28 E&P and 6 midstream companies, for a near real time look on production results. To learn more, or request a free trial, please click here