Breakeven Costs. The Devil’s in the Details.

February 6th, 2019 |

Earnings season is upon us.  The tidal wave of new data from public E&P companies will soon provide new insights into production, capital budgets, infrastructure timing and year-end reserves.  We expect more talk of capital discipline.  Producers are also likely to highlight their latest results, including the expected economics of production.  In anticipation of those announcements, today’s commentary looks at the production-weighted economics of publicly traded oil producers to understand how shale oil production costs compare to current oil prices.

Rates of return on investment in oil and gas are highly dependent on commodity prices. To simplify results, the industry discusses the economic potential of drilling in terms of a single breakeven price.  The chart below shows BTU Analytics’ breakeven index for some of the major US oil plays.

One might assume that prices in excess of the index indicate on average producers in a play are making money. Conversely, prices less than a index price indicate the companies are losing money.  However, true oil production costs are higher than the breakeven in this type of analysis.

Missing from these numbers are the additional costs that aren’t directly related to the physical production of oil and gas.  Corporate overhead and interest payments add to oil production costs.  The chart below combines BTU Analytics’ estimated breakeven costs for individual producers and corporate costs. The combination implies the necessity of higher oil prices for most producers over the long-term. Also, the addition of corporate costs reshuffle the deck of the lowest cost oil developers. While some companies drill low cost wells,  higher corporate cost structures result in them being the best positioned for today’s oil price environment.

Oil Production Costs

For a more detailed analysis on the cost of production by producer, including an in-depth features on Powder River Basin economics and an analysis of the impact of NGL prices on the outlook for US natural gas prices, request more information on our E&P Positioning Report, published last week.

Author: Kathryn Downey Miller

Kathryn Downey Miller is a partner at BTU Analytics, LLC and managing director of analytics and consulting services. She leads the firm’s consulting and analytics groups in delivering market advisory services to clients across all sectors of the energy industry. Prior to BTU Analytics, Kathryn led the consulting services group at Bentek Energy. Kathryn’s market expertise is drawn from a diverse set of prior roles within the industry, including buyside investment research focused on E&P equities, investor relations strategy consulting for E&P and service companies and investment banking. She speaks frequently at industry events on North American energy markets and is a CFA Charterholder.