Oil production in the once-gushing North Slope has been in steep decline for a number of years, with this year set to be the worst on record since the pipeline’s inception in 1977, and the Alaskan government is now drowning in debt from oil and gas tax credits that are no longer bringing much-needed cash flow to the state’s struggling economy. So why on Earth is one of the richest men in the world turning his back on Texas and putting his money into Alaskan oil?
Self-made multi-billionaire and Texas oilman Jeffery Hildebrand has made a career of investing in and revamping old oil and gas fields and steering clear of all of the shale hype that has boomed and now seems to be on the verge of busting in his home state’s Permian Basin. Now, as the West Texan shale boom slows down and the once red-hot Permian Basin becomes “toxic” in investment circles, Hildebrand has already moved on to his next frontier in the Last Frontier.
The oil industry veteran is making his next big play in Alaska, where his Hilcorp Energy Co. is buying up old wells and pipelines being unloaded at a discount from BP Plc. The British supermajor is leaving Alaska after operating there for 60 years, finally throwing in the towel on what it says is no longer a competitive investment.
Hildebrand’s Hildebrand’s Hilcorp Energy Co. has purchased $5.6 billion worth of BP’s holdings and infrastructure in Alaska despite the fact that Alaskan wells are all but dried up after years of severe decline as the company “chases fast-growing shale production that has transformed global energy markets over the past decade,” as reported by Bloomberg.
But what one company (BP) sees as a non-competitive money pit is, in Hildebrand’s eyes at least, simply a particularly attractive buyer’s market. “Hilcorp is somewhat uniquely following a counter-cyclical strategy, really going after these legacy assets that public companies are selling at pretty attractive price points,” Andrew Dittmar, a senior analyst at Enverus (a Texas-based oilfield data services company previously called Drillinginfo), was quoted by Bloomberg following a phone interview. “They will generate cash flow for decades.”
While $5.6 billion is a hefty sum, it’s less than 4 times the annual cash flow of the assets acquired, meaning that Hilcorp will likely make that money back in a hurry. Even if Alaskan oil wells do continue to decline, however, (as they very likely will), they will decline at a much slower rate than the shale wells that investors have poured hundreds of billions of dollars into in recent years. By comparison, $5.6 billion is a trifling sum, and its money that’s all but guaranteed to secure a return on Hilcorp’s investment.
Shale wells are attractive thanks to their gushing volumes of oil at the very beginning of production, but they decline extremely rapidly, leading to slowdowns like the one we’re currently witnessing in the Permian Basin. “Shale wells lose as much as 70 percent of their production in the first year, meaning that explorers have to constantly pour money into more drilling just to maintain production,” reports Bloomberg. “By contrast, once up and running, conventional wells lose as little as 5 percent each year, providing a much more solid production outlook.”
While shale oil plays are much more lucrative in the short term, their production levels, and therefore their profit margins, are entirely unsustainable. Looking at the difference between shale wells and traditional wells brings to mind proverbial tortoises and hares--and we all know who won that race.
“In the past five years, while everyone from Exxon Mobil Corp. to Concho Resources Inc. spent billions to get a slice of the shale boom, Hilcorp picked up assets in New Mexico, Wyoming and other oil properties in Alaska,” says Bloomberg. While it’s not the most common strategy, it is certainly on-brand for Hildebrand, who has made a career of laughing all the way to the bank as the industry questions his business decisions, even ones as seemingly ludicrous as putting billions of dollars into Alaskan oil when the sector seems almost certainly headed for the grave.
By Haley Zaremba for Oilprice.com
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