Check out this WSJ Energy Journal Exclusive where Trip Rodgers, Portfolio Manager at BP Capital Fund Advisors discusses shale-oil production with Neanda Salvaterra, of the Wall Street Journal.

WSJ Energy Journal Exclusive

Energy Journal Exclusive

The Oil Industry and Elvis Have the Same Data Problem, Says Analyst
The oil industry’s predictions of shale-oil production growth are like a popular legend about Elvis Presley, says Trip Rodgers, a portfolio manager at Boone Pickens Capital Fund Advisors.

Supposedly, there were 170 Elvis impersonators at the time of his death in 1977, notes Mr. Rodgers in a December research paper. At 31% annual growth rate, over 9 billion people would be dressed as the singer by 2043.

Yet a simple visual check rightly gives skeptics suspicious minds about those figures.

It’s a similar case for shale oil, Mr. Rodgers said. Logical constraints will limit its growth.

His firm conducted a survey of industry professionals in the Permian Basin, the oil-rich region straddling Texas and New Mexico. He found pressures ranging from a shortage of water and sand used to hydraulically fracture oil wells to rising labor costs.

The following are edited excerpts from an interview on Friday with The Wall Street Journal.

Q: How much do you project U.S. shale will grow?

A: Most of the industry thinks we’ll grow 1 million barrels per day or more in the next several years. We think there is risk of those forecasts but should some of these constraints come into play you will see substantially less of that.

We do think that in many cases analysts have extrapolated prior years’ growth in making the forecast …[that] U.S. shale production will swamp global demand and lead to lower prices. But …when you get on the ground and start to talk to people…you get a feel for what the challenges are.

Q: When do you think we’ll see some of these constraints slow the growth of U.S. output?

A: In the next couple of years we do see some of these constraints kicking in from labor to fracking equipment, water to logistics. The most obvious one would be labor.

The U.S. unemployment rate in January was 4.1%, the lowest in years. Basically the workers that were let go in the last downturn have largely re-entered the oil industry. Companies [now] have to recruit people from other sectors such as teachers or the military. The tightest market is for truck drivers. You can now earn $100,000 a year and get a signing bonus.

Q: What about the money pouring into the oil industry?

A: Capital discipline is one of the most powerful constraints. Companies are starting to listen to Wall Street and position their growth within their cash flows.

We were at a conference and many of the producers were asked point blank: With oil prices above $60 are you going to change your plans? They broadly said no and plan to maintain their budgeted production and use their excess cash for stock buybacks or increased dividends.

Q: What happened to all the Elvis impersonators?

A: Well it all goes back to labor tightness. Maybe they don’t get paid that much and they are in the oil fields now.