Our Macro Perspective...

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  A review of the past 25+ years highlights the unique nature of the “Golden Era” in the industry from 2009-2014. This period was the result of a confluence of several key factors, including:

• The Great Recession ('08) - this global event impaired investor confidence resulting in a focus on commodities. Oil’s relatively rapid rebound in Q3 2009 coupled with ease of low-interest debt due to quantitative easing (QE) laid the foundation of a growth-focused era.

• Horizontal Fracking - while both techniques had separately been applied for decades, the combination of predominantly slickwater fracs and horizontal wellbores proved revolutionary when applied to gas-bearing source rocks in the early 2000's. This refinement of frac technology was vital during the nearly wholesale shift to exploit oil-prone source rocks after the onset of The Great Recession; this domestic oil renaissance likely could not have rapidly flourished without the lessons learned from the preceding Shale Gas Revolution.   

• Unconventional Reservoirs - with investment flooding into energy, technological advancements of horizontal fracking, worldwide oil demand outpacing supply in Q3 2009 and a new reservoir style to explore, the beginning of the decade was ripe for an oil boom. The first half of the decade (2009-2014) saw companies aggressively compete to acquire acreage in basins with under explored oil-prone unconventional source rocks. Historically high prices and a “land run" approach resulted in many companies investing in poorer quality rock (Tier 2/3) outside of the sweet spots (Tier 1) of the basins to satiate investor appetites for ownership in burgeoning plays. The number of companies (and employees) swelled in the industry and by 2014, all of the legitimate unconventional reservoir sweet spots had been delineated. The "Golden Era" came to an end in Q3 2014 when OPEC opted to not extend production cuts in an oversupplied market, ushering a swift price collapse. In an attempt to reduce costs while justifying growth, companies with the best core acreage focused on the development and optimization of their Tier 1 positions. As the decade wore on and prices remained suppressed, Tier 1 fairways rapidly reached mature development forcing operators to begin drilling their lesser Tier 2/3 acreage. In order to obtain Tier 1 fairway results out of Tier 2/3 extensional acreage, operators rapidly up-sized completions (greater proppant loading/fluid/stage counts). Many either missed or ignored the reality that Tier 2/3 rock is fundamentally different from Tier 1 and cannot be overcome with larger fracs, as evidenced by steeper production declines and diminishing returns.   

 This study of the above factors highlights the idea that the preceding decade was a unique period derived from easy access to debt financing, drilling and completion technological advancements, demand growth and under exploited reservoirs. The end of this unique period was well underway prior to the events that occurred in Q2 2020 (price war/COVID-19). 

Dark Horse Management recognized that successful strategies from the previous decade will not translate into this new era. As such, this macro perspective helped shape our fundamental operating principles by identifying key, steadfast tenets, which include: 

• 1) Reservoir knowledge is vital - reservoirs vary across basins, especially source rocks and fundamental geologic principles still determine the locations of sweet spots.

• 2) Base production - maintaining base production is paramount; activity (new drills, optimization and/or acquisitions) should only occur with a clear path to near-term payout. Operators must target good reservoir rocks (Tier 1), develop them prudently and cost effectively. 

• 3) Lean organizations - over the past decade, G&A and operating costs outpaced cashflow in spite of efficiency gains due to the over capitalization of poorer quality reservoirs (Tier 2/Tier 3) in a suppressed price environment. Operators need to recalibrate into lean, adaptable organizations in order to achieve sustainability in the new era.

 In early 2019, Dark Horse management recognized the industry was undergoing a paradigm shift. In order to realize the opportunity presented by this new era, Dark Horse Exploration was founded in September 2019.