Shale Drilling Slowdown: A Mineral Owner's Perspective

After 10 years of seemingly successful shale drilling, why is the oil and gas industry slowing down? Why are stocks performing poorly? Why has capital dried up?
The answer is complex. There are multiple factors at play. We will look at overproduction, parent-child well spacing issues, forecast errors, reporting reserves vs "drilling locations", and a pump-and-dump mentality that has left investors burned.
1. Overproduction
Hundreds of thousands of long fracked horizontal wells have resulted in an overproduction of oil and gas, causing prices to decline.
2. Parent-Child Well Spacing Problems
Drilling wells too close to each other reduces the amount of oil and gas produced by the parent and all child wells. Production forecasts were based on tight well spacing.
3. Reserves vs Drilling Locations
Oil and gas company valuations used to be based on proven and producing reserves. Now they are based on potential drilling locations, which include "probable" and "possible" reserves.
4. Growth vs Profits
Companies focused on growth rather than profits, which lead to drilling uneconomic wells and taking on large amounts of debt.
5. Pump-and-Dump (or Find-and-Flip)
Rather than playing long-game, companies have a defined exit strategy, leading to a pump-and-dump mentality.
6. Lack of Due Diligence
Petroleum and reservoir engineers used to make drilling decisions, and lenders only financed what their experts deemed as economic projects.
7. Capital Drying Up
Lenders, particularly those in the North East, have been burned by investing in oil and gas without conducting proper due diligence and because of forecast errors.
8. What Now?
The oil and gas industry is having a "Come to Jesus" moment and learning that they need to play the long game, only drill in economically viable areas, secure funding from investors who know the industry, and put money back into the ground.
The parent-child well spacing image in the video is from an excellent WSJ article, "Shale Companies, Adding Ever More Wells, Threaten Future of U.S. Oil Boom" at www.wsj.com/articles/shale-co....
Learn more about the oil and gas industry slowdown at bluemesaminerals.com/oil-gas-...
Some mineral owners are interested in selling their minerals, while revenue is still high. If you are interested in selling your minerals, request an offer at:
Https://bluemesaminerals.com/

[@Trin100]

I would really like an update on this situation. With all that has happened in the last two years. The war in Ukraine and all. And especially shale play in western PA.

[@matthewludlam5433]

When you talk about the parent child well problem, why is it that, when they are drilled separately, the child wells produce so much less? Does the predicted revenue stream become inaccessible or does it just get reallocated in the surrounding formations?
Edit: As a follow up, you mentioned that a lot of newcomers to the shale industry are looking for an exit strategy with questionable methods. Has the Covid crisis slowed down the gold rush at all due to the drop in oil prices or is it still going strong / going to come back again soon?

[@BlueMesaMinerals]

These are excellent questions. A petroleum or reservoir engineer would be a better person to ask about the parent-child well spacing issues. From what I understand, child wells produce 15-20% less than the parent wells, and the more tightly the wells are spaced, the greater the loss. However, if both the parent and child wells are drilled together (also called co-developed), the results are much better. I'm not exactly sure why this is, but I can imagine that few companies can fully develop a field in this way. Especially right now. A lot of companies like to drill one well in each lease, which allows the lease to be held by production (HBP). They use the revenue from one well to drill the next and, in this way, they lease up the tier 1 or core properties with the intention of going back to drill additional wells later. I could go on and on about this.
As for your second question, the global shutdown caused by the Coronavirus and subsequent collapse in oil prices has been devastating to the oil and gas industry. WTI has recovered to the 40-ish dollar range, which is probably economical for some leaner companies. Companies are scaling way back, trying to survive this downturn by reducing employees and operations. Many landmen feel like their careers are over. Will the industry recover? In time, I think it will, but I don't think we'll ever see the kind of gold rush that we saw for the last decade. And that's not because of COVID. The oil and gas industry was already in huge trouble by the 4th quarter of 2019.
The political situation and results of the 2020 election will also have an impact on future drilling activity.

[@love4lust7301]

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