Shale exploration and production requires continuous drilling, due to 80%-90% three-year well decline rates.
Continuous drilling begets continuous borrowing, since shale wells are so expensive.
GDP and MHR have already sunk the most money into the ground vs. their peer group, relative to what they generated, since 2011.
GDP and MHR will run out of money within the next year, and are unlikely to be able to borrow any more.
And yet GDP and MHR have some of the highest valuations in the group.
Industry Background: Shale Exploration and Production Is a Net Cash Flow Drain for E&P Players
For all its recent glory and rapidly rising revenues (and valuations), the economics of shale oil and gas are fundamentally flawed. Googling “shale companies lose money” and “drilling treadmill” will bring up dozens of thought-provoking sources; what follows in this section is a brief distillation. The problem with all shale plays is their extremely high decline rates, unlike anything seen in conventional basins:
(click to enlarge)