Where to Invest in Oil Now
Why Talk About Break-Even Prices?
In the oil business, the break-even price is the price of oil per barrel you need to break even (neither make nor lose money) on the capital investment of drilling an oil well.
It’s an essential number to calculate and understand when deciding whether drilling a well makes economic sense.
Projected numbers for break-even points vary widely across oil and gas investments, though. Why?
What’s the Difference Between Horizontal and Vertical Drilling?
Vertical drilling refers to drilling a wellbore straight down, more or less. It was historically the way to drill, but with advances in technology horizontal wells, where operators drill the wellbore horizontally, have become more popular.
What’s the Real Break-Even for Horizontal Drilling?
What’s the true break-even price in the Permian, Scoop, Stack and other popular unconventional basins? There are many opinions, but today I refer to a Wall Street Journal article that outlines the factors to consider when evaluating economics in big frack, heavy horizontal wells.
“For one, breakevens generally exclude such key costs as land, overhead and even at times transportation. Estimates by consulting firm R.S. Energy Group peg breakevens excluding land costs and overhead at about $37 for the Permian Basin of West Texas and New Mexico, $42 for the Eagle Ford in South Texas and $47 for the Bakken in North Dakota.
“But companies require much higher oil prices in order to come out ahead if more of those necessary expenses are taken into account, the consulting firm’s data show. All-inclusive breakevens are about $51 in the Permian, $57 in the Eagle Ford and $64 in the Bakken, according to R.S. Energy.”
Unconventional wells require horizontal drilling and large hydraulic fracture stimulation (frac) jobs to commercially produce a well. Additionally, unconventional assets are highly competitive with every major oil and gas producer fighting for acreage, driving up lease costs. So, while unconventional wells can bring profits, these development programs require higher oil prices to be economically viable.
What’s the Break-Even Price for Horizontal Drilling?
Conventional, vertically drilled wells (like the ones EnergyFunders drills in the upper Gulf Coast) have some advantages. However, many people considering where to invest in oil now overlook them as private equity money focuses on the Permian and other unconventional basins.
Some things we consider in drilling vertical wells instead of horizontal:
- The cost of entry into conventional wells is much lower and you can lease oil and gas acreage affordably.
- You can drill at a reasonable cost.
- Most conventional wells do not require hydraulic fracture stimulation to produce.
- If successful, you reap the benefits of higher margins per well than anything you find in unconventional basins.
When you add up the upfront capital for horizontal drilling, your break-even number on a per well basis can be around $30/barrel. This gives operators with vertical drilling projects an opportunity to profit even if oil prices are lower.
Where to Invest in Oil Now
Some argue with the unconventionals that it’s not a matter of whether you find oil, it’s how much. While this seems attractive (and it can be with the right opportunity), the high cost to enter unconventional fields and lack of diversification opportunity can lead to a bad investment if you don’t count all the costs. Today, one major deterrent for horizontal drilling is that pipeline capacity issues can impact the profitability price in these high-traffic basins.
So for those considering where to invest in oil now, we think a smart strategy considers both conventional and unconventional wells. Then, when we strike oil, we reap the benefits of higher profit margins and can operate in any price environment.