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Permalink Reply by Jack Straw on March 27, 2013 at 7:42am

RE: "Does anyone have any idea what profit margin an oil and gas company likes to work at?"

My experience:

When the O & G Industry looks at potential places to invest, they rank the various potential projects (after factoring in risk) in a seriatim manner ... from highest expected ROCE (return on capital employed) to lowest ROCE ... with a lower threshold of 15% ROCE.

The O & G Industry want to obtain a minimum15% annual return on invested capital.

If you go to Yahoo Financial and look at the metrics for the various O&G outfits working in the Marcellus and Utica (Chevron, RDS - Shell, Chesapeake, EXXON, Range Resources, Consol, etc.) you can calculate what their corporate returns tend to be.

Also, the big boys (and the big boys have pretty much chased out the little guys) tend to be geographically  diversified in order to not risk it all on one hand of cards.

Right now (courtesy of the Fed and Quantitative Easing) the cost of borrowing money is very cheap .... making it easier to approach that 15% ROCE threshold. 

The big oil companies do make a lot of money, but they make that big money because they are big; with a great deal of capital at risk. Their historical ROCE is not at all large, not when compared with Apple and many other companies.

 

Right now, the dry gas areas of the Marcellus are likely uneconomic ... the industry has moved to the wet gas and oil areas of the Marcellus and Utica. Right now, the industry are not likely making their desired minimum ROCE in the dry gas shales.

 

I am all for the Landowner getting the most that they can (that is where I and my loyalties lie); but, right now, the Landowner is in a weak negotiating position. Low commodity prices lower the ROCE. Since the O&G Industry is so very cyclical (Boom to Bust); I expect that things will change ... and the next change will be more to the benefit of the Landowner who can be patient.

 

All IMHO,

                 JS

 

 

 

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Permalink Reply by 0i7okn54zwbdo on March 27, 2013 at 7:49am

Best explanation of how the industry works so far on this site.  Well said, Jack.

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Permalink Reply by Jack Straw on March 27, 2013 at 5:28pm

RE: " I find no upfront bonus payment an interesting concept, as it could tip the scales and allow smaller companies into the play."

Why would one want smaller companies into the play?

Smaller companies would potentially lack the resources to handle matters in an efficient or responsible manner.

Would smaller companies have the financial wherewithal to handle things were they to go south?

 

Recently, there have been some lads who think that they can get a bunch of guys together at the local watering hole and cheaply drill their own Marcellus or Utica wells. They think that they can do what the experts do for pennies on the dollar.

 

For the operators of the Marcellus and Utica, these wells cost in the range of $5 million-$10 million dollars each to drill ($20 - $40 million dollars for a four well pad).

 

How can they do it at such a cost?

Well, they have their extensive in house staff of experienced experts to plan and oversee the operations; no need to go out and find outside consultants (expensive and unknown quantities).

They have long standing relationships with the big money banks, they can cheaply borrow money or issue corporate bonds.

They have long standing relationships with the various skilled sub-contractors; they can negotiate the lowest prices and have the trusted staff to oversee these sub-contractors.

They have long standing relationships with suppliers; they get the lowest prices for services and tubular goods, etc.

They drill multiple wells from a single pad (great savings in mob/demob moving costs); just walk that rig over and “make hole”.

 

What type of financial resources do the companies who are drilling the Marcellus and Utica have behind them.

A company’s market capitalization is a measure of what the investing public believe a company is worth (they are betting with their wallets).

 

The small Marcellus/Utica operators:

MHR – Magnum Hunter - Market Cap  688.15M

REXX - Rex Resources - Market Cap  846.62M

CRZO  - Carrizo - Market Cap  1.05B

UPL – Ultra Petroleum - Market Cap  3.10B

GPOR – Gulfport Energy - Market Cap 3.63B

CNX  - Consol Energy - Market Cap  7.86B

 

The mid-sized operators:

EQT – EQT Corp.- Market Cap   10.24B

ECA – Encana – Market Cap   14.23B

RRC – Range Resources - Market Cap  13.08B

CHK  - Chesapeake Energy - Market Cap  13.25B

COG - Cabot Oil & Gas - Market Cap  14.28B

HES  Hess - Market Cap  24.39B

EOG   - EOG Resources - Market Cap  34.84B

APC – Anadarko - Market Cap  44.43B

 

The large operators:

STO – Statoil - Market Cap  77.59B

RDS-A – Shell Oil -  Market Cap  205.35B

CVX – Chevron (Atlas) -  Market Cap  233.49B

XOM Exxon (XTO) - Market Cap  405.84B

 

The larger contractors:

HAL – Haliburton -  Market Cap  37.89B

SLB – Schlumberger -  Market Cap  99.75B

 

Do these lads who think that they can drill their own wells have in house staff of experienced experts to plan and oversee the operations?

Do these lads have long standing relationships with the big money banks, such that they can cheaply borrow money?

Do these lads have long standing relationships with the various skilled sub-contractors; such that they can negotiate the lowest prices?

Do these lads have long standing relationships with suppliers; such that they can get the lowest prices for tubular goods, etc?

Do these lads have the financial resources such that they can drill multiple wells from a single pad (great savings in mob/demob moving costs).?

Do these lads have a clue as to what it takes to manage matters start to finish?

Do these lads really thing you can go to some outfit and get a turnkey well drilled "on the cheap"/

 

I believe that the answer to all of the above is a resounding NO!

Do they have the resources that remotely compare with the current smaller Operators, you know the ones who only have a market capitalization numbered in the hundreds of millions of dollars?

 

Maybe these lads could hire someone to manage matters for them, I understand that a chap by the name of Aubrey McClendon will soon be available.

My educated guess is that for the lads to accomplish what experienced operators do for $5-$10 million; their costs would be of the order of $8-$16 million a well (a sum that would likely make the endeavor totally uneconomic).

Mt advice to the lads - put down that bong, put the cap back in that bottle and leave the Vicodan in the medicine cabinet.

 

All IMHO,

                    JS

 

 

 

 

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