Isn't the "inventory" issue a good thing?
It is no secret that investors have questions about E&P inventory, the quality of acreage (oil vs. NGL vs. gas), and well productivity.
But from my vantage point, I ask, “Isn’t an issue with inventory a good thing?”
In this post:
I try to look at the questions around “inventory” and “productivity” but within the historical context of prior cycles.
Show how the metric of Reserve/Production also known as the reserve life index (RLI) is NOT a great predictor like it once was and what may be a better substitute.
Show just how little the industry as a whole has been spending on the “exploration” side of the business and what this could mean for future finding & development costs (F&D)
Let’s dive in.
Putting the inventory & productivity narrative within a historical context
Stage 6 of every cycle is what I term the “Hubbard’s Peak” Fear stage.
If you go back and read history, towards the latter stages of every secular bull, the narrative always emerges that we are running out of oil.
For now, just check out the last row of the table below and save the rest for bedtime in case you have trouble going to sleep.
I like to call it “Hubbard’s Peak Fear” but it has gone by many other names.
In the 2000’s it was called peak supply.
This cycle it may go down as peak “inventory” and/or “well productivity.”
And to be very clear, I do NOT think we are fully in stage 6…yet.
But if you think we are in the midst of a multi-year commodity bull market then declining inventories and declining well productivity is tinder for your fire.
The chart below addresses the question of declining well productivity.
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