Drill Baby Drill: Now is the Time to Buy USA Oil and Gas Assets

Preamble: Oil and gas asset owners and operators know the difference between Red States and Blue States -- never more evident than during the 2024 election season as both sides in Pennsylvania sparred, and then chose not to spar, about fracking (the process of injecting water, sand, and a mix of chemicals, into horizontal wells to crack rock formations in order to release oil and gas deposits). Permitting costs, including legal, consultant, lobbying, and other indirect costs, can add significantly to operating Costs-of-Goods, which more often than not, will become a determining decision factor whether to proceed with an acquisition or expansion effort, or not. Notwithstanding the Red State vs Blue State metric, President Trump’s champaign mantra or promise to Drill Baby Drill, created angst among some oil and gas asset owners and producers who then fear much lower oil and gas prices -- or a stress on operating margin -- that can equally cause a decision not to acquire new assets, or invest in expanding existing production. In my view, this quandary of a more favorable political climate vs flooding the market with more oil is moot if you adopt a plan that focuses on buying PDP, if you use objective tools to accurately measure your lifting and breakeven costs, and by better managing ongoing operating performance..

While there are great longer term benefits in finding new oil, there are great opportunities to buy existing production with modest production decline, and then expand those assets with plans for infill drilling.

Understanding Operating Breakeven: As technologies leap forward, operators have the ability to pursue newer drilling and extraction methods, and operate more efficiently. For instance, In a piece Titled, Cost/Benefit of Horizontal Wells (SPE 83621), the Society of International Petroleum Engineers determined, in part, that aggregate lifting costs for horizontal wells vs vertical wells was $3.33 per barrel vs. $8.30 in Eastern Oklahoma. More about Eastern Oklahoma later. Moreover, many studies differentiate between the operating costs of assuming existing producing assets rather than what is deemed unconventional oil and gas pursuits (shale plays, offshore or wet leases, C02 injection wells, among others). Please see the two charts. While there are great longer term benefits in finding new oil, there are great opportunities to buy existing production with modest production decline, and then expand those assets with plans for infill drilling (or adding wells within the same footprint where other producing wells are located over proven reserves). We tend to focus our target acquisitions toward areas of higher gravity oil which, by definition, requires less operating costs as the wells are more shallow. Known oil and gas formations in Eastern Oklahoma, Eastern and Northeastern Texas, and other areas, produce from zones between 2,500 to 5,000 ft or so while Western Oklahoma and West Texas pull from zones 11,000 to 15,000 ft deep or more. Moreover, higher gravity oil is considered cleaner or sweet crude, which commands a premium from oil buyers. Please check out my earlier Blog Posts by clicking on the “tags” below for deeper analysis or explanations on Gravity, Zones, PDP and other topics discussed here.

Combine the much more favorable political climate with an investment agenda that focuses on buying existing production or PDP assets in higher gravity areas where aggregated lifting costs are no more than $20 per barrel, and investors can confidently expect returns that consistently beat the S&P 500.

Drill Baby Drill and Why Now is the Time to Buy USA Oil and Gas Assets: Texas, Oklahoma, North Dakota, Wyoming, Arkansas, Louisiana, Montana, Alaska, among others, are considered Red States for oil and gas exploration and production. Pennsylvania, New Mexico, Nevada and a few others have become more purple or a bit more friendly to oil and gas. And while California is among the largest oil and gas producing States, its political climate is deeply blue and therefore, I choose to focus my acquisition efforts elsewhere. Given the incredible Trump victory and his inauguration a few weeks ago, the political winds have shifted much more favorably toward oil and gas exploration, production, and to a long-term reliance on hydrocarbon as our nation’s primary and most efficient form of energy. Combine the much more favorable political climate with an investment agenda that focuses on buying existing production or PDP assets in higher gravity areas where aggregated lifting costs are no more than $20 per barrel, and investors can confidently expect returns that consistently beat the S&P 500. Specifically, assume low $40 per barrel oil prices, $20 per barrel lifting costs, and $5 for financing, the operating breakeven would be $25 per barrel which leaves $15 per barrel in margin wherefrom G&A and profit can be allocated. I can’t speak to bloated or more subjective below-line costs and expenses for various companies, as that has little, if any, effect on operating breakeven, but if presented with a prospect of earning 37% EBITDA on fully secured invested capital, most would jump on it.