(WHITE)CAPPING OFF A GREAT RUN
Whitecap Resources has run its business in a sustainable manner from day one
I have a dream for the North American energy sector should we ever emerge from this world of moribund oil prices, a dream of self-sustainability.
The price of oil has collapsed because the American shale producers, with their growth first, profits later business model, drilled us into an oversupply. Had these companies not leveraged up and grossly outspent their self-generated cash flows, we wouldn’t be in this mess.
Wouldn’t it be great if, on the other side of this oil bust, the entire North American energy sector adopts a sustainable approach to business? Instead of borrowing as much as possible and focusing on growth, how about living with- in cash flow and maybe even paying a dividend? That way, we wouldn’t oversupply the market with oil and we could also keep service costs under control.
Believe it or not some independent producers have been doing that. To make it work, companies need a fast payout play so they can quickly recycle cash and anchor their cash flows. One such play is the light oil producing Viking in West Central Saskatchewan. Viking wells don’t have big initial production rates but they have something else: good economics at reasonable oil prices. The Viking formation is not deep so it doesn’t take long to drill, which means costs are low (under $800,000 per well). While those costs keep coming down with each passing year, the industry is also drilling better wells.
The leaps and bounds the industry has made when it comes to the productivity of horizontal wells is another reason why rapid growth and outspending cash flow is a flawed strategy. Think about how many well locations were drilled in 2012 and 2013 using now outdated technologies and techniques. By going slowly, the producers would have been drilling many of those locations later using better techniques with the result being significantly higher initial production rates and larger ultimate recoveries.