Our Historical Analysis

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COVID-19 is commonly blamed for the industry's current collapse. Our holistic review of the past 45+ years highlights the unique nature of the most recent downturn ('20 price collapse) and how this was a natural outcome at the end of a cycle. Below is our high-level interpretation of the current and historical price collapses and the various contributing factors that shaped each period.

'82 Price Collapse - Global Recession

• Worldwide economic recession greatly diminished oil demand resulting in oversupply
• Near all-time high US interest rates deterred investment
• Conventional reservoirs were primary focus 
• Mainstream drilling and completion techniques involved vertical wellbores and minor stimulations
• Activity provided slight domestic oil production growth until 1986 against backdrop of low decline conventional reservoir production

'86 Price Collapse - Saudi (OPEC) Ceased Production Cuts

• Worldwide energy demand remained suppressed - Saudi decision to cease cuts rapidly flooded supply
• Interest rates had decreased significantly since the early '80s but ran between 7% to 9%
• Price shock led to drastic drop in rig count and activity 
• World economic picture and energy demand remained suppressed in oversupplied market
• Vertical drilling remained mainstream; early horizontal wellbores employed in plays such as Austin Chalk and Barnett Shale
• Shallow production decline from conventional reservoirs dominated US oil output until 2009 focus on unconventional rocks

'98 Price Collapse - Asian Economic Crisis

• Worldwide oil demand hamstrung by Asian financial crisis during time of increasing inventories
• Interest rates increased in mid-'90s to 8%+
• Price shock led to short-lived reduction in rig count and activity
• Vertical drilling remained mainstream technique; horizontal wellbores remained sparsely used
• Shallow production decline continues with diminished activity levels

'08 Price Collapse - The Great Recession

• Near all-time low interest rates resulting from quantitative easing (QE) policy stimulated a flood of investment into energy
• Worldwide demand outpaced supply (Q3 2009)
• Transition from conventional to unconventional reservoirs 
• New types of reservoirs to explore and revitalization of interest in previously overlooked basins
• Adaptation of hydraulic fracking techniques from unconventional gas reservoirs to unconventional oil reservoirs
• Efficiencies not yet a major driver in early play delineation
• Production declines from unconventional reservoirs were observed to be greater than conventional reservoirs

'14 Price Collapse - Saudi (OPEC) Ceased Production Cuts

• Patient investors remained optimistic; interest rates remained suppressed through Q3 2017
• Supply and demand in close balance with oversupply looming
• Unconventional reservoirs dominate activity and production; horizontal drilling surpassed vertical as the dominant technique 
• Price collapse caused companies to retreat to Tier 1 rock positions and transition away from exploration to development phase
• Free cash flow remained elusive due to rapidly escalating frac intensities outpacing drilling efficiencies
• Domestic production declined rapidly with drastic reduction of drilling activity in response to November 2014 price collapse 
• Steep production decline became a prominent feature as unconventional tight oil accounted for nearly half of US production by 2015
• The latter part of the decade saw operators move to develop Tier 2 & 3 rock as Tier 1 fairways rapidly reached mature development  

'20 Price Collapse - Saudi (OPEC) Ceased Production Cuts/COVID-19 Destroys Demand

• By early 2019 investors had lost patience with the lack of meaningful cash flow returns from unconventional reservoirs
• Supply and demand in close balance
• Unconventional reservoirs dominate activity and production
• OPEC+ ceased production cuts on March 6th amid early COVID-19 demand destruction, sending oil prices into a free fall
• To obtain Tier 1 results out of Tier 2/3 rock, operators rapidly up-sized completions with diminishing results
• Drilling and completion efficiencies are reaching a natural limit

Below are a few key takeaways: 

• 1) The dearth of available capital, lack of new economic unconventional plays, the approach of a natural limit to drilling and completion efficiencies and worldwide suppressed demand all point to diminished activity and significant contraction of domestic oil production. 

• 2) Reserves from Tier 1 unconventional reservoirs were squandered in a short duration as the first 8 years of oil-focused shale development prioritized growth above all else – producing into an oversupplied market at suppressed prices.  Tier 2 & 3 unconventional reservoirs require oil prices north of $75/bbl to provide a reasonable time to payout.

• 3) The recent drop in crude output is steeper than the drop of 2015 largely due to diminished rock quality in unconventional reservoirs. As the rig count stays near 250, domestic production will fall precipitously far beyond minor curtailment.   

Certainly in the last 45 years, if not longer, the industry has not witnessed a downward cycle such as today's. Analyzing the factors that drove each cycle is necessary to guide sound energy investments in the current market and beyond.