Provisional 2013 Earnings Estimates For Independent E&P Companies
We continue to see an exciting transformation within the US oil and gas business. Buoyed by high global oil prices, solid growth is being reported across the entire sector. Drilling down further into the data, into the shale patch specifically, the advent of horizontal drilling and hydraulic fracking has led to some exceptional growth. Consequently new investment stars have emerged in the names of Brigham ( BEXP ), Northern ( NOG ) and Kodiak ( KOG ). From 2010 to 2011 these logged sales growth of 150%, 230% and 450% and from 2011 to 2012 they are projected to bump sales by a further 90%, 100%, and 330%. These are enviable growth figures, especially considering the weak economic backdrop.
Will the growth last?
Shale drillers must deal with a particular phenomenon - low rock porosity that causes a steep fall-off in flow-rates during the early life of an oil well. Output may be about 180,000 barrels in year 1, followed by 80,000 in year 2, then 60,000 in year 3 and so on. In order to continuously grow production and profits, shale producers must roll out ever larger capital expenditure budgets over time. Hence, some question the potential of the shale sector to produce good profits. In actual fact shale producers are reporting some of the absolute highest profit margins in the entire E&P sector. Their big profits are producing strong cash flows which facilitate large capital expenditures and which, in turn, lead to even higher profits. A self perpetuating profits-cashflow-capex cycle is already under way. Thus, to the question “Will the growth last?” an examination of the profitability and cash flows of individual shale drillers say a clear “Yes,” certainly with oil at about $90 per barrel.