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Originally Posted by Dan02
This is pretty much completely backwards from everything I've been told/read, maybe you have some different insight to share??
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Its really just my opinion formed after reading all sorts of material on the subject, the most influential being a commentary by Peter Tertzakian at ARC earlier in the week where he discussed the topic. I think it makes a lot of sense.
The shale guys production costs are around $75-$85 dollars. They can cancel investment fairly quickly (just stop drilling), so when the price drops to $50 they're the first out. Meanwhile, the massive O&G projects in flight (Suncor/Total/Teck's Fort Hills) are too far along to cancel...so they look good on a go forward basis, but not on a full cycle basis.
That's what we're seeing right now. The shale guys are cutting back so they look like they are hurting the most. But if the price returns to that $75-$85 area, they can ramp drilling back up fairly quickly. And most importantly, there's much less risk to investing in those future cash flows because most the wells play out in only a couple years.
Now look at the major projects. If I'm a capital dollar and am looking at them as a home, I'm relying on decades of cash flow to pay off the tens of billions in up front costs. I value those future cash flows by discounting them at my required rate of return. But after the events of the past few months where we've seen massive volatility and a price war that can be started as easily as Saudi Arabia turning on the tap, as a capital dollar I'm a lot more scared to plunk my money down on a major oil sands project. Basically, I'm going to command a higher rate of return. Since the number of barrels in a project can't be changed, that can only come from one thing...higher prices.