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> Over the last decade, the US shale industry had become a byword for capital destruction. Shale investors recovered about 50 cents for each dollar they investe

> Over the last decade, the US shale industry had become a byword for capital destruction. Shale investors recovered about 50 cents for each dollar they invested during the 2010-2020 period. Oil business is not that easy to analyze. There is no such thing as "recovered about 50 cents for each dollar invested". People think the oil business is all about drilling. In reality it's first about reserves and then about drilling. "Each dollar invested" goes first towards acquiring new reserves and upgrading existing ones (from possible to probable, from probable to proven). A bit of "each dollar invested" goes into the actual drilling. The sale price of the oil certainly exceeds the actual cost of drilling (oil producers are very, very elastic in shutting down drills). But how exactly do you measure the return on investment for the money that does not go into the actual drilling?

nocoiner 4y ago
I am frankly kind of shocked that “credit_guy” is kind of glossing over the tremendous amounts of high-yield debt that were deployed to fund the shale drilling program between 2010-2020 that creditors took an absolute bath on.
cellis 4y ago
Au contraire, it's simple math. If I invest 1 dollar in 2010, and get back 50 cents in 2020, I have in fact lost 50% of my money over that time period. It's the same as any other asset class.For example, If you're a portfolio manager and you invest in a biotech startup index and only 5% of them produce drugs, you would likely lose 50% or more of your money over 10 years, and there's no accounting for "maybe they'll have a breakthrough later", as you need your capital back due to capital calls or redemptions or whatever.
- foota 4y ago
  But if there's an expected value from the rest of your investment that you're not counting, then it's not an honest way of looking at things.
  - kevviiinn 4y ago
    Expected is not realised
    - foota 4y ago
      Sure, but it's also not a loss.
- prepend 4y ago
  So if you buy a municipal bond for $1 on 2010 and it’s only yielded $.50 by 2020 have you in fact lost 50% of your money? Of course not. No one interested in investing looks at money so simplistically.
  - jjeaff 4y ago
    Investors would consider $0.50 return on $1 over 10 years to be a loss. Money isn't free and that same dollar invested in an sp 500 index fund would have yielded $2.50 for that same time period.
    - prepend 4y ago
      It depends on the investors. Yes, the s&p returned more in this period, it usually does, but not always. There’s reasons why other investments exist and one is the risk of the investment. Municipal bonds are really stable and some investors just want predictable returns and will sacrifice overall returns for stability and lower risk. Oil investments aren’t municipal bonds, but I expect most oil investors want stable returns.
    - dghlsakjg 4y ago
      You are misusing the terms yield and return, and seem to have a misunderstanding of how a muni bond works. A muni bond would have yielded $.50, but you still have the underlying asset, so it isn't a loss, its a guaranteed return of 50% every 10 yrs, until the bond matures (you get your $1 back) or is defaulted on. The SP500 doesn't guarantee anything, and there are 10 yr periods where it has negative growth.
      - jjeaff 4y ago
        No, I used the term yield correctly. $1 in the sp 500 over that time period would have increased to $3.50. Or a yield of $2.50 while maintaining the underlying asset of $1. As for it being a muni bond, the risk is low but still there. Municipalities do in fact default sometimes.
  - refurb 4y ago
- whatever1 4y ago
  You realize that a typical oilfield project takes 10 years to start producing the first barrel of oil right? You generate assets during that period and the potential to pump oil. Same way that you invest money to a startup with 0 revenues.
  - slashdev 4y ago
    Not in shale. That’s measured in as little as months.
- bigger_cheese 4y ago
  I don't think it is that simple as claiming a 50% loss for the business you have things like inflation and depreciation of the business assets (such as the drilling equipment) which makes it a lot more murky.
ggm 4y ago
The short form of this is "some people make money drilling for oil, and some people make money by NOT drilling for oil, and some people make money inbetween the two states, depending" "Making money" is complicated. If you hold rights to shale oil, they may be worth more or less, depending on external conditions. You might sell on those rights, or leverage those rights, and it might go on a long, long time and never be actually invoked to process the shale. It was the act of being ABLE to, which drove the money cycle. It put a bottom over supply chain risk.
jojobas 4y ago
2010-2020 period is on average 8 years ago. Was there really an expectation of >6% capital recovery?
- jjeaff 4y ago
  The markets did more than 12% annual returns for that decade.
  - jojobas 4y ago
    That's an average of essentially a lot of different bets. Shale oil was a bet on very high oil prices, this didn't eventuate and they still managed some kind of returns above the interest rates.
    - jjeaff 4y ago
      Just the market rate of return. If your money could have done better in an index fund, you've lost.
- deleted 4y ago
  [deleted]
EdwardDiego 4y ago
Oil business is about small margins being created at each step of production leading to a large margin at the end. The way BP structures itself to do so is amazing. The BP company that owns the exploration rights pays BP to determine the feasibility, then BP pays BP to extract the oil, then BP pays BP to ship the oil, then BP pays BP to refine the oil, then BP pays BP to distribute the refined products, then BP pays BP to fill the tanks at the bowsers, then we pay BP to fill our car, and every one of those BP segments makes a margin. So yeah, I agree, just because a drilling operation looks like a loss in isolation, unless you view it in context of that entire vertical integration, you're missing the woods for the trees.
- Spooky23 4y ago
  It’s also like real estate where tax strategy drives the bus. Oil is a capital intensive business but by isolating each layer or spinning off the layers alot of the margin is essentially a transfer from the government. Oil is one of the original businesses that developed these strategies. John Rockefeller was surprised to have made money post Standard Oil!
- deleted 4y ago
  [deleted]
- lotsofpulp 4y ago
  > then BP pays BP to fill the tanks at the bowsers, then we pay BP to fill our car, and every one of those BP segments makes a margin. In the US, this last step is not BP. The gas station is almost certainly not owned by BP, but rather pays BP royalties as a franchisor, and also does not buy oil from BP directly, I believe a gas station operator buys from separate trucking businesses that contract with refineries (that may or may not be owned or operated by BP) to deliver the oil to the gas station.
- whatshisface 4y ago
  >The way BP structures itself to do so is amazing. That's just vertical integration, a lot of companies do it to varying degrees. For example there is a long history of power plants owning coal mines. Bell, at one point in history owned the mines that produced the resources they used to make their telephones!
whatshisface 4y ago
It sounds complicated, but it's actually very simple. Each of those stages is a saleable product, and you can cash out at any time by selling it to someone who works on the next step in the chain. It's just like selling bonds before their maturity, and it works according to the same NPV calculus.
- credit_guy 4y ago
  Sure, it is a saleable asset. But you find the price only when you actually sell. You can estimate in principle how much your oil fields are worth, but that does not go into your accounting books, just like if you are a landlord you don't mark to market the price of your rental properties. And if your accounting does not reflect the current market value of your reserves, numbers like "50 cents on the dollar" are plucked out of thin air by journalists who want to shock readers.
alach11 4y ago
> People think the oil business is all about drilling. In reality it's first about reserves While this is true traditionally, shale is a different ballgame. A lot of the money spent in these shale plays is gone forever. If you spend $8 million to drill a well and expect to make a 20% ROR at $70 oil, you're going to have a bad time when the price of WTI collapses to $40. And these shale wells have such fast decline rates that 10 years later they'll be making 1/100th of their initial rates. You either make your money fast, or take a big loss on the chin. The major price decline beginning in 2014 and the huge hit during the pandemic (oil prices went negative, remember!) has made shale a major loser for investors. And plenty of the reserves companies booked had to be written off, either because of overly optimistic price requirements or inflated production estimates. Just look at Apache's Alpine High fiasco.

nocoiner 4y ago

I am frankly kind of shocked that “credit_guy” is kind of glossing over the tremendous amounts of high-yield debt that were deployed to fund the shale drilling program between 2010-2020 that creditors took an absolute bath on.

cellis 4y ago

Au contraire, it's simple math. If I invest 1 dollar in 2010, and get back 50 cents in 2020, I have in fact lost 50% of my money over that time period. It's the same as any other asset class.For example, If you're a portfolio manager and you invest in a biotech startup index and only 5% of them produce drugs, you would likely lose 50% or more of your money over 10 years, and there's no accounting for "maybe they'll have a breakthrough later", as you need your capital back due to capital calls or redemptions or whatever.

foota 4y ago
But if there's an expected value from the rest of your investment that you're not counting, then it's not an honest way of looking at things.
- kevviiinn 4y ago
  Expected is not realised
  - foota 4y ago
    Sure, but it's also not a loss.
prepend 4y ago
So if you buy a municipal bond for $1 on 2010 and it’s only yielded $.50 by 2020 have you in fact lost 50% of your money? Of course not. No one interested in investing looks at money so simplistically.
- jjeaff 4y ago
  Investors would consider $0.50 return on $1 over 10 years to be a loss. Money isn't free and that same dollar invested in an sp 500 index fund would have yielded $2.50 for that same time period.
  - prepend 4y ago
    It depends on the investors. Yes, the s&p returned more in this period, it usually does, but not always. There’s reasons why other investments exist and one is the risk of the investment. Municipal bonds are really stable and some investors just want predictable returns and will sacrifice overall returns for stability and lower risk. Oil investments aren’t municipal bonds, but I expect most oil investors want stable returns.
  - dghlsakjg 4y ago
    You are misusing the terms yield and return, and seem to have a misunderstanding of how a muni bond works. A muni bond would have yielded $.50, but you still have the underlying asset, so it isn't a loss, its a guaranteed return of 50% every 10 yrs, until the bond matures (you get your $1 back) or is defaulted on. The SP500 doesn't guarantee anything, and there are 10 yr periods where it has negative growth.
    - jjeaff 4y ago
      No, I used the term yield correctly. $1 in the sp 500 over that time period would have increased to $3.50. Or a yield of $2.50 while maintaining the underlying asset of $1. As for it being a muni bond, the risk is low but still there. Municipalities do in fact default sometimes.
- refurb 4y ago
whatever1 4y ago
You realize that a typical oilfield project takes 10 years to start producing the first barrel of oil right? You generate assets during that period and the potential to pump oil. Same way that you invest money to a startup with 0 revenues.
- slashdev 4y ago
  Not in shale. That’s measured in as little as months.
bigger_cheese 4y ago
I don't think it is that simple as claiming a 50% loss for the business you have things like inflation and depreciation of the business assets (such as the drilling equipment) which makes it a lot more murky.

ggm 4y ago

The short form of this is "some people make money drilling for oil, and some people make money by NOT drilling for oil, and some people make money inbetween the two states, depending" "Making money" is complicated. If you hold rights to shale oil, they may be worth more or less, depending on external conditions. You might sell on those rights, or leverage those rights, and it might go on a long, long time and never be actually invoked to process the shale. It was the act of being ABLE to, which drove the money cycle. It put a bottom over supply chain risk.

jojobas 4y ago

2010-2020 period is on average 8 years ago. Was there really an expectation of >6% capital recovery?

jjeaff 4y ago
The markets did more than 12% annual returns for that decade.
- jojobas 4y ago
  That's an average of essentially a lot of different bets. Shale oil was a bet on very high oil prices, this didn't eventuate and they still managed some kind of returns above the interest rates.
  - jjeaff 4y ago
    Just the market rate of return. If your money could have done better in an index fund, you've lost.
deleted 4y ago
[deleted]

EdwardDiego 4y ago

Oil business is about small margins being created at each step of production leading to a large margin at the end. The way BP structures itself to do so is amazing. The BP company that owns the exploration rights pays BP to determine the feasibility, then BP pays BP to extract the oil, then BP pays BP to ship the oil, then BP pays BP to refine the oil, then BP pays BP to distribute the refined products, then BP pays BP to fill the tanks at the bowsers, then we pay BP to fill our car, and every one of those BP segments makes a margin. So yeah, I agree, just because a drilling operation looks like a loss in isolation, unless you view it in context of that entire vertical integration, you're missing the woods for the trees.

Spooky23 4y ago
It’s also like real estate where tax strategy drives the bus. Oil is a capital intensive business but by isolating each layer or spinning off the layers alot of the margin is essentially a transfer from the government. Oil is one of the original businesses that developed these strategies. John Rockefeller was surprised to have made money post Standard Oil!
deleted 4y ago
[deleted]
lotsofpulp 4y ago
> then BP pays BP to fill the tanks at the bowsers, then we pay BP to fill our car, and every one of those BP segments makes a margin. In the US, this last step is not BP. The gas station is almost certainly not owned by BP, but rather pays BP royalties as a franchisor, and also does not buy oil from BP directly, I believe a gas station operator buys from separate trucking businesses that contract with refineries (that may or may not be owned or operated by BP) to deliver the oil to the gas station.
whatshisface 4y ago
>The way BP structures itself to do so is amazing. That's just vertical integration, a lot of companies do it to varying degrees. For example there is a long history of power plants owning coal mines. Bell, at one point in history owned the mines that produced the resources they used to make their telephones!

whatshisface 4y ago

It sounds complicated, but it's actually very simple. Each of those stages is a saleable product, and you can cash out at any time by selling it to someone who works on the next step in the chain. It's just like selling bonds before their maturity, and it works according to the same NPV calculus.

credit_guy 4y ago
Sure, it is a saleable asset. But you find the price only when you actually sell. You can estimate in principle how much your oil fields are worth, but that does not go into your accounting books, just like if you are a landlord you don't mark to market the price of your rental properties. And if your accounting does not reflect the current market value of your reserves, numbers like "50 cents on the dollar" are plucked out of thin air by journalists who want to shock readers.

alach11 4y ago

> People think the oil business is all about drilling. In reality it's first about reserves While this is true traditionally, shale is a different ballgame. A lot of the money spent in these shale plays is gone forever. If you spend $8 million to drill a well and expect to make a 20% ROR at $70 oil, you're going to have a bad time when the price of WTI collapses to $40. And these shale wells have such fast decline rates that 10 years later they'll be making 1/100th of their initial rates. You either make your money fast, or take a big loss on the chin. The major price decline beginning in 2014 and the huge hit during the pandemic (oil prices went negative, remember!) has made shale a major loser for investors. And plenty of the reserves companies booked had to be written off, either because of overly optimistic price requirements or inflated production estimates. Just look at Apache's Alpine High fiasco.