Enabling Rapid and Accurate Oil & Gas Breakeven Modeling

Summary

In the current low-price oil and natural gas environment, understanding breakeven pricing for the US shale industry and individual company performance is critical. Now more than ever due to #COV19 and the ongoing oil price war, the US shale industry is under pressure to increase efficiencies and lower breakeven prices to stay afloat. But what is a breakeven price? Per the Wall Street Journal, ?At its simplest, the metric represents the oil price that a company needs to generate enough cash so it can cover its capital spending and dividend payouts.? But unfortunately, many companies utilize different definitions for how a breakeven metric is calculated, making it difficult and time-consuming to conduct accurate analysis. This could mean the breakeven price to generate enough cash flow to pay for the initial outlay of capital for that well. However, it?s usually more prudent to calculate returns required for the discounted rate of return equal to the cost of capital for a given operator. In short, this is a fluid calculation that requires the ability to change a variety of key assumptions. 

At the request of our clients, Enertel designed and added a breakeven analysis module into our Spotfire-based oil and gas (O&G) production and economic modeling suite, Quantum. 

Our goals were to:

• Maintain the same intuitive user interface (UI) and user experience (UX) minimizing training requirements while maximizing impact for the user 
• Provide rapid analysis of thousands of wells, across companies, counties, or entire basins using publicly available data
• Provide straightforward ?apples to apples? breakeven comparisons with user-selected granularity based on publicly available data points that are available for nearly every state
• Applying geospatial analytics and machine learning to aid in visual comparisons and comparative analysis 

The goal of this post is to demonstrate not only the breakeven modeling capabilities but to also highlight using the power of Spotfire to conduct a typical analysis in one application without the need to use spreadsheets, which are clunky, slow, and difficult to standardize.

Industry Applicability and Use Cases

Operators, investors, and other financially incentivized O&G participants have always required prudent decision making. This is exasperated in a low/volatile oil price environment, coupled with tighter capital spending and increasing debt exposure. Enertel designed Quantum?s breakeven module to provide these various users with the capability to rapidly screen, validate, and compare potential opportunities much faster than conventional methods. The breakeven module provides the following:

• Easily select a subset of wells for analysis - by operator, county, basin, etc.
• Rapidly conduct breakeven analysis for varying expense and price deck scenarios
• Using ML techniques, ?bin? thousands of wells into clusters, or like groupings, which show different tiers of breakeven pricing by operator
• Comparatively rank operators/assets by historical results and the implied breakeven pricing, as well as grade future development potential in a commodity price-constrained environment
• Rapidly screen companies and wells for potential acquisitions

Enertel Breakeven Spotfire Dashboard

Figure 1:  Quantum?s Breakeven Spotfire Module

Figure 1 shows the component layout for the Quantum Breakeven module. As consistent with our overall platform design goals, Enertel utilized Spotfire?s inherent capabilities to place all relevant input controls, mapping, charting, and analysis in one easy-to-visualize and easy-to-manipulate table. In this version, a dark theme is employed to increase screen contrast while decreasing eye strain from bright monitors. A light-themed version is also available to simplify the creation of presentation materials outside of Spotfire.

Additionally, the Breakeven module is dynamically linked with all other Quantum analysis tabs in the same program, allowing the user to select and build upon desired operators? batch declines and other parameters throughout the model. This complete O&G workflow analysis is captured in one .DXP, from type curves to PDP/PUD economics, well spacing, breakevens, and other BI tools. This approach alleviates the need to jump from program to program increasing user efficiencies and deal screening.  

First, on another tab we conducted batch single-well declines across a 3500+ well selection in a couple of minutes, spot-checked those results against a variety of statistical and visual checks, and moved to the Breakeven tab to conduct further analysis.

The Breakeven module components and their functionality are highlighted below:

 Breakeven Controls

• Capex costs for drilling and completion (D&C) are computed based upon a combination of true vertical depth, lateral length, proppant, and fluid amounts.  If the user does not have detailed D&C cost assumptions, an override of $/Completed Lateral Foot ($/CLAT) may be selected. Depending on either method, an active implied $/CLAT is shown as a calculated value

• Revenue Assumptions providing flat pricing assumptions for oil, gas, and NGLs 

• Fully-Burdened Deducts allow the user to input heavily simplified monthly fixed and variable costs 

• Note: Although Quantum has advanced economic modeling tools with far more robust economic inputs and price modeling, for breakeven analysis this is simply trying to place all wells on an equal playing field based on simplified assumptions. 

• Breakeven Sensitivity input for the Net Present Value (NPV) calculation required for a well to be considered at a breakeven. This enables the user to calculate breakeven pricing for undiscounted and discounted cash flow.

These document properties are neatly nested in an HTML table which provides a simple and clean user experience, while also being visually appealing. The look and feel of every document property is consistent throughout the entire model and makes use of our dark theme. We have also added tooltips to each subheader, allowing users to quickly learn what each input controls.

Spotfire text areas are very similar to websites in the sense that they can be easily customized using HTML, CSS, and Javascript. There are benefits and downsides to each of the customization options.

As a helpful tip, in order to perform text area customizations through CSS your Spotfire Administrator will have to ensure that HTML sanitation is turned off for users. Otherwise, CSS style sheets can be embedded as Javascript and callable within HTML styles.

We typically prefer to avoid Javascript as a way to avoid potential compatibility issues with version changes. Although Javascript accordian menus can help with navigability, we believe it tends to be a better user experience to see all of the available inputs.

Calculating Breakevens

Selecting the Calculate Breakevens button rapidly performs calculations using the control inputs and updates the module providing ease in conducting various scenario simulations and sensitivity analyses as seen in the graphic below:

Figure 2:  Breakeven Calculation    

In this example, there were eight operators selected, incorporating over 3500 wells, and each well has up to 30 years of monthly production history and forecasts. Using the individual batch declines calculated for each of the 3500+ wells, oil, gas, and NGL forecasts are combined with the economics assumptions to compute single-well economics for every well, calculate discounted free cash flow, and then iterate on commodity pricing to find the breakeven point. As you can see, these calculations happen nearly instantaneously thanks to the power of Tibco?s TERR engine, which can compute these calculations up to 30x faster than open-source R.

The Breakeven scatterplot is customized via document property drop downs, enabling users to easily change pre-determined axis variable selections for the Y, X, and color by properties of the scatterplot visualization

 Geospatial Analytics

The Breakeven mapping function provides geospatial analytics based on the user-selected wells within the map. Upon selecting wells and clicking on the Map Breakevens button, a probabilistic heat map is generated on breakeven ($/BBL) across the selected wells and all points between them. Further, this takes well header attributes from the selected wells and computes a shapefile of the lateral length, orientation, and plots the breakeven price within the lateral. 

Best of all, the entirety of this functionality is built from the ground up and uses zero package dependencies so the DXP is easily shared between colleagues or hosted on a Web Player for easy collaboration. 

Figure 3:  Mapping Calculations    

Conclusions

Spotfire provides an easily customizable canvas for conducting economics sensitivities that would take days using other tools. Because of the flexibility of Spotfire, these sensitivities can be distilled down to a few seconds. From text area customizations that enable users to create web-like dashboards and interactive controls, to the powerful TERR engine that can compute massive amounts of data in near real-time. Being able to quickly layer on additional machine learning functionality that isn?t possible in spreadsheets, and interactively mapping these answers out geospatially, provides the ability to understand and infer from these workflows like never before.

About Enertel

Enertel is a data & analytics firm that provides clients with unparalleled data-driven intelligence through software solutions and strategic advisory services. Enertel's core product, Quantum, leverages Spotfire software to provide industry-leading engineering and financial modeling workflows to quickly evaluate oil & gas assets using public data. Enertel also provides consulting services to help companies execute on data science, technology, and business transformation initiatives by building bespoke tools that enable enterprises to innovate at startup speed.

Authored By:

Jon Henderson, Chief Analytics Officer ? Enertel