The Shale Gas Revolution?

On today’s show we’re talking about a couple of widely publicized articles on the state of the oil and gas industry. Oil and Gas are major drivers of the economy, and as such, the cascade into real estate is inescapable. 

The first was a presentation by Steve Schlotterbeck, who led drilling company EQT as it expanded to become the nation’s largest producer of natural gas in 2017, arrived at a petrochemical industry conference in Pittsburgh Friday morning with a blunt message about shale gas drilling and fracking.

“The shale gas revolution has frankly been an unmitigated disaster for any buy-and-hold investor in the shale gas industry with very few limited exceptions,” according to Schlotterbeck, who left the helm of EQT last year. Schlotterbeck is not the first industry insider to ring alarm bells about the shale industry’s record of producing vast amounts of gas while burning through far more cash than it has earned by selling that gas. And drillers’ own numbers speak for themselves. Reported spending outweighed income for a group of 29 large public shale gas companies by $6.7 billion in 2018, bringing the group’s 2010 to 2018 cash flow to a total of negative $181 billion over the past decade.

Schlotterbeck is right in saying that the price of gas has to rise in order for the industry to survive.  The main issue is that natural gas needs a way to get to market. If not, then there will be local excess of supply and prices will fall. That’s exactly what has happened. 

The payback on the investment is often happening far past the initial gusher of oil or gas. Shale wells have a steep production decline curve where production flows fall by 85% in the first year. A well might produce for 20-25 years, but the volumes will be low. About 50% of the well’s lifetime yield is given up in the first 18 months. Since Wall Street always expects revenue growth, companies need to expand drilling operations in order to show revenue growth. But if a well doesn’t achieve break-even in the first 18 months, the only solution is to invest ahead of production. That results ultimately in negative cash flow. The local glut of gas has caused prices to fall which has killed the financial model. 

Only when global distribution is in place, prices for US production will normalize. Prices vary widely around the globe and it all has to do with distribution. The end buyers of natural gas will pay the cost of the gas, plus the cost of transportation. The sum of those two is the real cost to the end-customer. 

The major investments in infrastructure in Lake Charles are taking advantage of the pipeline infrastructure that is already in place. Tellurian is also adding another 120 miles of pipeline from Texas to Lake Charles. The other plants like the Ethane Crackers are producing the end-product (plastic) without any further transportation. So yes, infrastructure investments like in Lake Charles are key to solving the problems that are referenced in both articles. 

If your real estate is dependent on the economics of a major industry, it’s vital that you understand that industry. Otherwise you’re taking a major risk that your revenue projections may not come true.