We’re all well-watchers now,” said Subash Chandra, managing director-senior exploration analyst for Jefferies & Co., addressing an audience of more than 850 at Hart Energy Publishing’s first annual Developing Unconventional Oil Conference in Denver.

Chandra described Wall Street’s view of the Bakken shale-oil play and shale-oil plays in general.

Jefferies has advised on joint ventures between Chesapeake Energy/Total in the Barnett shale and Reliance Industries/Atlas Energy in the Marcellus shale, among others.

Chandra noted that shale plays have upended global energy decisionmaking.

“We now have dollars coming into the U.S. because the opportunities here are great, rather than just dollars going out,” he said. “The best part is that for U.S. companies, but largely, the independents, this is an exciting and gratifying moment.

“Years ago, I was one of the few analysts following Mitchell Energy (which kicked off the Barnett shale) and I couldn’t believe I practically had that coverage to myself. Everything they did seemed to make sense, and the industry was on the verge of fracturing horizontals.

“When the company was bought out, I thought I wouldn’t find another Mitchell. But of course, years later, we have found many more Mitchells, and even more are coming.”

The shales have fast-forwarded analysts’ and investors’ approaches to the industry.

“My day is different post-shale versus pre-shale,” he said. “For one thing, analysts no longer have the luxury of time. Today, after the first well gets drilled, everyone is watching. And if the second well confirms the results of the first, the cat’s out of the bag.

“One of the things people used to say about the hedge funds is that they were well-watchers, and that the long-term money doesn’t do that Well, everyone is a well-watcher now. It’s the rules of the game.”

Closeology is defining shale investment as well.

“One well doesn’t just define a company now, it can define an entire play—and it wraps up every single company in proximity,” said Chandra. “And I’m being generous in how I define proximity. It’s the science of closeology. I get calls all the time asking what the wells are doing, and what are the dozen companies in the area.”

Chandra noted that Jefferies & Co., through both its banking and research arms, has been a big fan of shale oils for some time. These plays are price-sensitive, however, he cautioned.

“When I bought my plane ticket, we were at $80 oil, and it’s now in the $70s. This may be a near-term glitch, but in the world of shale oils, it makes all the difference.”

Four aspects define the shale-oil picture at present, he said. The pace of these plays is “the speed of light.” Individual wells have outsized influence. Closeology is a driver. And probables have disappeared, for the most part. “Probables make me uncomfortable,” said Chandra. “Of the five or six transactions we’ve seen, I can’t find the probables. I can’t see where the buyer paid for them.”

Why is well-watching the byword? “It’s a bull market, but more importantly, investors are getting more confident in assessing whether plays will work,” the analyst said. “We have more information, more examples, and more giants to stand on the shoulders of.”

Chandra addressed some of the most frequent questions he gets about the shale plays.

Are companies trying to “juice” their results to get headlines for the highest IPs with all the multiple frac stages, or do the increasing multiple stages have economic merit? “We think they do have merit,” he said. “From single- to double-digit frac stages the results are impressive in estimated ultimate recoveries.”

In the Bakken, are the Three Forks/Sanish and Bakken zones two straws in the same glass? “We think the companies have two zones,” he said.
What are the economics? “The fortunate few in the core in the Bakken are making a killing,” he said. Outside the core, in the “Bakken light,” companies need $70 oil. Most shale-oil plays will need $70 to work, he said.

As for the Eagle Ford shale play, Chandra noted it is “red hot.”

“I have never seen a single play move from borderline to outright skepticism to an outright embrace in six months” as has the Eagle Ford, he said. The dry-gas portion of the Eagle Ford isn’t economic at $4 gas, however, he said. The oil-window portion looks promising, and a lot more activity is imminent.