FORT WORTH, Texas—Rick Lester asks a lot of questions, sifting through “unknowables” until he finds the ones that really matter, like:
- Is there oil here?
- Can it be produced economically?
- Is this a project we can execute?
The CEO of Houston-based Opal Resources LLC has come up with the right answers often enough to earn the trust and financial backing of investment bank Goldman Sachs, but he remains laser-focused on asking the right questions, whether they relate to a particular project or to industry conditions in general.
Take, for example, movements in oil prices.
“If you look at crude oil pricing, the futures price is about $48 a barrel,” he told attendees at Hart Energy’s recent DUG Permian Basin conference. “In December of 2021, a buyer or trader can buy a barrel of crude oil for just under $56 a barrel.
“It’s always intrigued me: Is the futures price predictive of what’s going to be happening?” he continued. “I would say it’s predictive only if the current conditions remain static through that timeframe. So the question to me is: what outside force is going to cause the trajectory of the crude oil price to move from where it is today?”
Lester noted that the U.S. Energy Information Administration (EIA) crude price forecast sticks with the futures prices in its 2016 forecast but veers away in 2017, indicating that its analysts anticipate an outside force changing the trajectory of the oil price.
Comparing cycles
So Lester turned his inquisitive eye to the downcycle itself and compared it to past cycles.
“What catches my attention is not the percentage drop, which is significant and has been pronounced the last two cycles, but it’s the length of the cycle,” he said. “In the current cycle, we had a 21- to 22-month drop from peak to trough vs. five to six months in mostly every cycle. It’s the length of the cycle that tends to kill a lot of companies.”
It’s not possible to predict precisely when the cycle will change except in hindsight, he said. But rather than try to forecast when the next big event will strike, Lester said it’s more pertinent to simply acknowledge that’s it’s coming sooner or later, and prepare for it.
“If we’re all smart, in a downcycle we’re preparing for the next upcycle,” he said. “In an upcycle, we’re preparing for the next downcycle. That’s a tough roller coaster to handle.”
Reality check
Lester’s medicine for this wild ride might be hard to swallow but it’s important: take a reality check. Determine whether the priorities you’ve set for your company are harmful during the current environment and need to be changed.
“We need to be prepared to change priorities rather quickly, which means we need to look at priorities fairly often,” he said. “If you have a great plan, it’s not worth a hill of beans if you can’t execute the plan.”
In addition to standard risk factors, Lester’s Opal Resources takes a hard look at entry costs in its Permian Basin operations.
“As a greenfield developer, if we can’t bring a project into a viable proven state at reasonable entry costs, then we’re kidding ourselves,” he said.
And that has led to some tough decisions for Opal, which is active in the Permian’s Central Platform Basin.
“One of the reasons we left the Midland Basin is because the cost of entry had become prohibitively high for us,” he said. “Undeveloped leases that we could buy for $150 an acre in 2009-2010, we sold for $5,000 an acre in 2012-2013. We stopped leasing in the Midland Basin at about $2,000 an acre, and that was in the 2001-2012 period.”
Life on the margin
Lester’s advice:
- Don’t get hung up on predictions: “That’s what politicians do. We need to have a view but we also need to know our companies”;
- Take what the market will give: “Sometimes we’re buyers, sometimes we’re sellers, sometimes we hold”;
- Know your company: “If we don’t know our company, we really don’t know how to manage through these cycles.”
And back to the reality check: this roller coaster-type business is subject to sudden and dramatic acceleration, climbing, tilting, dropping and backward motion. Deal with it.
“Tight oil lives on the margin,” Lester said. “A lot of the folks have been very fortunate or very good to develop assets that are in the sweet spot in the heart of some of these different plays. They’ve earned the right to drill where they want to drill—their economics are different.
“The truth is, most of us live on the margin. If we live on the margin, we just have to be aware of that. It makes life a little more difficult and a little bit more interesting, to say the least.”
Joseph Markman can be reached at jmarkman@hartenergy.com and @JHMarkman
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