The abbreviation “DUCs,” which is being used recently in oil and gas company investor presentations, stands for “drilled but uncompleted”. Otherwise known as the “fracklog,” these are shale wells which have been drilled but which have not been hydraulically fractured or fracked. In order for a shale well to produce oil or gas it first must be completed. This process is usually done by a third party service company, such as Halliburton, and involves using thousands of gallons of highly pressurized water and a cost of several million dollars.
Drilling costs amount to only about one – third of the total cost of a producing Eagle Ford Shale well. Well completion costs make up the other two – thirds. Lower oil prices are forcing companies to leave oil in the ground rather than frack those wells which have already been drilled, only to break even or lose money.
In April, 2015, Bloomberg estimated that there were around 1,250 DUCs in the Eagle Ford Shale. That number could be higher now that oil prices have fell below $40 per barrel.
EOG Resources Vice President Of Exploration and Production, “Billy” Helms, recently reported at the Wells Fargo Energy Symposium that his company alone planned to exit 2015 with around 320 DUC wells, of which most are in the Eagle Ford Shale. Oil companies with strong enough balance sheets are gambling that higher oil and gas prices will return and ROI will be much greater when oil returns to the $50 – $60 range. Others without such strong balance sheets are being forced into completing their best high EUR wells in a low price environment with the hope that they can produce a high enough volume of oil at the lower price to stay afloat.
In some areas of the Eagle Ford Shale, where EUR (Estimated Ultimate Recovery,) rates are less than 400,000 MBOE, DUCs may not break even until the price of oil reaches the mid $60/bbl range. It is likely that if oil remains below $45 for several more months that we will see a wave of small E&P company bankruptcies as lenders call in their notes.
Of course it was the aim of Saudi Arabia all along to break the shale producers and retain market share.
In fact, the Saidi strategy has made already strong companies stronger for the long run, while also flushing out some of the highly leveraged smaller companies which were only profitable at oil prices near $100. Many of these companies were doomed from the start, having paid too much for low quality acreage. These late game players, such as Goodrich Petroleum (GDP) are behind the eight ball and must “drill or die,” yet are unlikely to source enough capital to do so.
The looming effect of DUCs is that when oil prices begin to recover, companies will reach into their uncompleted inventory and unleash more production, which will dampen any major recovery for oil.