Here’s Why Producers Are Still Pumping At These Prices

Here’s why Producers are Still Pumping at These Prices

It’s easy to see how we arrived where we are at with domestic oil supply when you look at the production numbers coming out of North America’s shale oil plays. The production volumes are enormous in some of these areas. Take the Eagle Ford Shale for example. Initial production on some of these units boasts more than 100,000 barrels a month. ConocoPhillips royalty owners benefited from production in excess of 1 million barrels within a year of wells being drilled in one particular unit in Live Oak County, Texas.

Of course there are other domestic and global factors that play a role in the supply glut, but if production is one factor that can be controlled, why has production remained at the levels it is at given the current market conditions? Many companies are producing at losses and would still be losing money if oil prices were significantly higher.

A big reason is this:  if the price of oil drops to half of the price needed to cover obligations, production essentially needs to double in order to make up for the short fall. If a company has substantial cash on the sidelines or little debt, they may be able to weather current market conditions and wait for higher prices. However, especially now, debt-to-equity ratios in the oil patch are high and getting higher. This is especially true in the shale plays where well depletions are very steep. The only way to offset depletion (which translates into cash flow depletion) is to drill more wells which in turn adds to the supply glut and pushes oil prices further down.

The question that should concern mineral owners is whether the royalties from oil production on their mineral leases are being diluted as companies continue to sell high volumes of production at low prices in order to stay afloat.