It’s not as easy as sticking a straw in the ground…

Are cracks starting to appear in the illusion that is the shale oil “revolution”? It seems that one such crack may have appeared yesterday as Forest Oil Corporation (FST) reported disappointing Q4 drilling production numbers, missing estimates.

The company recently divested assets in an effort to reduce debt and focus on the Eagle Ford basin. In doing so it has become even more dependent on its Eagle Ford assets for growth, and indications are that this bet is not playing out well for them. Last quarter’s well results from the region were not what they were hoping for and 2014 production guidance and product mix toward oil was less than expected.

As a result of these drilling challenges, they have elected to delay further drilling and head back to the drawing board, and are looking to instead focus their efforts in East Texas, where it costs more to get oil out of the ground and they have a limited track record.  In reaction to yesterday’s news, we saw the company’s stock fall more than 37% and the senior bonds take a 9-10% hit.

We believe that the spin of the shale “revolution” is overblown.  As shale basins like the Eagle Ford are developed, the natural course of events, as would be the case with any oil field, is that the “sweet spots” get snapped up early and drilled out first. However, unlike a conventional oil field, the rapid declines rates of shale oil necessitate continuous drilling just to keep production rates flat.

Showing Page 1 of 2