Dave Meats: The potential exhaustion of Tier 1 shale acreage is a common fear in the market that we think is overblown. Shale fields are not homogenous--the productivity is higher in so-called sweet spots, and there's a lot of uncertainty about how much of the good stuff is left. If it runs out soon, the marginal cost of production could rise significantly, taking oil prices with it.
In the Eagle Ford Shale specifically the best acreage could be drilled up in about five years, but this does not apply to the Permian Basin or the Bakken. The Permian is at least 10 times thicker than the Eagle Ford, and there's enough runway in the Tier 1 sweet spot to keep operators busy for another 15 to 20 years. Bakken operators still have plenty of low-cost prospects as well. And don't forget, while the shale industry has already made huge productivity advances through technology, including longer laterals and high-intensity completions, there's still scope for further improvements that could offset any acreage-related declines. There's no shortage of Tier 1 acreage, and no mechanism for crude prices to move higher, even though that's what the market expects.
In light of our bearish outlook, it might seem counterintuitive that we see several cheap stocks in the E&P space. That's because not all shale is equal. There are some companies with good acreage in the sweet spots of the Permian that can consistently generate very strong margins relative to the peer group, and these are the companies that we like. RSP Permian and Diamondback are the top picks, based on a combination of good acreage and very lean operations. These companies also have enough balance sheet strength to cope with lower prices for a period, if we see another downward leg from here.