SandRidge’s Mississippian Wells are Improving

The Mississippian Lime has put companies and investors alike on a roller coaster ride during the last couple of years. When SandRidge Energy (SD) and Range Resources (RRC) started hitting big wells such as the Puffingbarger 1-28H and Balder 1-30N (see below), EUR and IRR projections ballooned to 600MBOE and more than 100%, respectively. Subsequent drilling has shown that these wells are more the exception than the rule, leading companies to slash their expectations considerably.

Big Wells in the Mississippian Lime
puffin-balder-misslime-well

Source: The Well Map.

The Lime’s inconsistency has led some companies to leave the play and some to dial back expectations, but there’s reason to believe companies are finally starting to figure out its eccentricities. SandRidge saw production results improve approximately 20% from 2011 to 2012. These results coupled with a decrease in wells costs have increased the economics of the play.

SandRidge began drilling in the Lime in late 2010, meaning their oldest wells have produced for about three years. The company is currently estimating that its wells pay out in two years, so we took a look at their oldest producers to see if those estimations are accurate.

The average well the company turned to production prior to 2012 has produced 26 MBO (thousand barrels of oil), 197 MMcf (million cubic feet of natural gas) and 4 MBNGL (thuosand barrels of natural gas liquids). Assuming $88 oil, $4 natural gas, $40 natural gas liquids and an NRI of 80%, these wells have grossed $2.5 million in two years.

Revenue by Hydrocarbon

Miss_Revenue-by-Hyrocarbon

Source: The Energy Harbinger / Oklahoma Tax Commission.

This data tells us that SD’s early wells didn’t pay out in two years based on a $3.2 million well cost. While that’s an important data point, investors should be more concerned with the results from the next thousand SD wells than the first 100. So let’s compare these results to what we’re seeing from the company’s newer wells.

Average Production by Well During First Year (2011 to 2012)

miss-production-graph

Source: The Energy Harbinger / Oklahoma Tax Commission.
*Natural gas production converted to barrels based on 6:1 energy equivalency.
**Assumes 12% of natural gas stream is NGLs.

While natural gas production has remained flat, oil production by well increased approximately 20% from 2011 to 2012. This is important because oil is responsible for roughly 73% of a well’s revenue. If the 2012 wells continue to produce 20% higher than the 2011 wells, they’ll gross $3 million by their second year. SD is currently modeling sub $3 million well costs for the Lime wells, which means their newer wells are paying back in two years. A two year payback period is on par with most major oil plays in the United States.

At this point, we’re not sure why SandRidge’s newer wells are producing more oil. It could be that the company is able to focus on its better areas after it delineated it acreage or the new frac designs they’ve cited in their earnings transcripts are paying off. Either way, the production improvements make it a stock to watch for the future. To that end, Range is also tweaking its frac designs and has reported strong results in the few wells it has used to test the design.

If you track the Lime, you’ve probably heard of Petro River Oil (PTRC) who held its IPO earlier this year. The company has 85k net acres in the Mississippian and 32k net acres in a heavy oil play in Missouri. It recently attracted outside capital when Petrol Lakes (Chinese investment group) purchased $6.5 million in stock from Petro River. If you like micro-cap stories, these guys have an impressive management team which makes it a stock to watch.

The San Juan Basin: What You Need to Know

General Information
Why I should care: It’s a new horizontal play with some interesting production results.
Geographical location:  Northwest New Mexico.
Producing formations: Gallup, Mancos.
Main operators: Encana (ECA), WPX Energy (WPX).
Leasehold: ECA (176k net), WPX (31k net).
Average well cost: $4.5MM.
Average Royalty: 18%.

Average Peak Month Production by Formation
Gallup (27 wells): 275 BOPD and 406 Mcfpd (81% Oil).
Mancos (9 wells): 194 BOPD and 265 Mcfpd (71% Oil).

Source: www.thewellmap.com / New Mexico Oil Conservation Division.

Average Peak Month Production by Operator
ECA (27 wells): 215 BOPD and 409 Mcfpd (74% Oil).
WPX (6 wells): 391 BOPD and 318 Mcfpd (87% Oil).

Source: www.thewellmap.com / New Mexico Oil Conservation Division.

Average Peak Month Production by County
Rio Arriba (3 wells): 173 BOPD and 332 Mcfpd (56% Oil).
Sandoval (14 wells): 354 BOPD and 545 Mcfpd (79% Oil).
San Juan (16 wells): 175 BOPD and 271 Mcfpd (79% Oil).

Source: www.thewellmap.com / New Mexico Oil Conservation Division.

Largest Well by Cumulative Production
San-Juan-Basin_Biggest-Well

Source: www.thewellmap.com.

Smallest Well by Cumulative Production
San-Juan-Basin_Smallest-Well

Source: www.thewellmap.com.

Economics
Assuming $90 oil, $3.50 gas, 80% NRI and $4.5 well cost, a company needs to recover approximately 60 MBO (thousand barrels of oil) and 65 MMcf (million cubic feet of natural gas) to break even. Of the 10 wells that have been producing in the play for two years or longer, 3 have broken even. These three wells had peak production rates ranging from 275 BOPD and 718 Mcfpd to 535 BOPD and 854 Mcfpd. These ranges give us some parameters which will alow us to judge the ecoomics of new wells coming on.

The average peak month rates for wells spudded in 2013 are 329 BOPD and 400 Mcfpd, numbers that are similar to our early wells that have broken even. While it’s very early in this play, I think there’s reason to believe the average San Juan Basin well will pay back in two to three years which makes it competitive with current major plays from an economics standpoint. Will it be as big? Highly doubtful, but it could provide a nice production/earnings bump for the play’s early entrants.

The Well Map Update (12-3-13)

Testing is finished with The Well Map and we’re going to go live next week. Here’s what you need to know:

*There’s roughly 13k wells on the map and we’ll be adding more each week.
*The 13k wells include areas such as the Bakken, Eagle Ford, Miss Lime, Powder River Basin, DJ Basin, Piceance Basin, Permian Basin, Granite Wash, Marcelllus and Utica.
*We’ll be updating existing data and adding new data all the time. Wells from the San Juan Basin, SCOOP and Marmaton are coming soon.
*For quick analysis of the data we’ve installed several filters including operator, well name, formation, wellbore, spud date, state/county and production ranges.
*Once data is filtered, the filter summary averages the data filtered which allows the user to pull data points such as average production by operator, formation or state quickly.
*The map will be free, all you have to do is sign-up.
*If you want to stay up to date on the new wells we add each week and crunch raw data, we’ll be offering several newsletters containing just that, these start at $50/month.
*To stay up to date on new features and launch information, like us on Facebook and follow us on Twitter.

Thanks for your support,

The Well Map Team

The-Well-Map

Can Iroquois Fix Gale Force Petroleum?

Last week, Texas oil producer Gale Force Petroleum (GFP) received its second letter this year from one of its top shareholders, New York based Iroquois Capital Opportunity Fund (ICO Fund). The letter was ICO Fund’s second request for GFP to shake-up its Board of Directors who, according to ICO, have caused “severe mismanagement of Gale Force’s otherwise valuable assets.” GFP’s share price, which closed at $0.14 on October 1, has been in a tail-spin since peaking at $0.38 in March 2012. The 63% price slide (see graph below) reflects decreased production due to poor well results and a lack of overall direction for the company.

If you’re not familiar with Gale Force, their assets include its Texas Reef prospect which consists of 4,300 acres in Anderson and Henderson Counties in East Texas, 4,101 acres in Wood County (East Texas) and 795 acres in Bee County (South Texas). They also own 10,000 non-operated acres in the Marcellus which serves as a nice cash flow piece. The Texas Reef asset was acquired in April 2012 for $4.6MM and is considered the company’s primary asset. To help finance the purchase and development of Texas Reef, GFP sold its interest in certain Oklahoma properties for $6.5MM in March, 2013. These assets produced at an average rate of approximately 121 BOEPD (40% oil) at the time of the sale.

Predictably, the sale of the Oklahoma properties caused the company’s average production to decline to160 BOEPD during the quarter ended June 30, 2013, 42% lower than the 277 BOEPD the company averaged during the same quarter in 2012. This production decline was expected to be offset by production increases from the Texas Reef play and its other assets which GFP predicted would “triple production year-over-year in 2012.” Unfortunately, completion mistakes caused its first two Texas Reef wells to produce from a water zone.

These results combined with significant hedging losses have left the company with $5.5MM in debt due in July, 2014, $706M in cash on its balance sheet and trailing 9-months operating cash flow of -$1.3MM. To make matters worse, one of its primary shareholders, Iroquois Capital, doesn’t believe management is capable of turning the ship around.

Gale Force’s Stock Price (April 2011 – October 2013)

gale force_stock price chart

Source: Yahoo Finance / The Energy Harbinger.

If Iroquois’ assertion that Gale Force’s stock price slide has more to do with “lack of effective oversight by the board,” than resource quality, the graph above shows that the market might agree. From April, 2011 to June, 2012, the oil weighted company’s stock tracked WTI before decoupling in the latter half of 2012. When an oil company decouples from WTI to this degree, either the asset base has deteriorated or the company is experiencing financial/operational troubles.

It would be difficult to argue the former as GFP’s asset base has certainly gotten oilier after the divestiture of the Gregg and Rusk County assets in Oklahoma. Production from these assets was approximately 40% natural gas and its sale raised $6.5MM which was used to pay down debt. Now the company is sitting on 2 million barrels of oil equivalent (MMBOE) (68% oil) in East Texas and the market is valuing the assets at $9.76 per barrel. This valuation is low when one considers the assets are in an established oil field and only 24% of the reserve basis is producing.

Just how undervalued is GFP?

peer comps

Source: Financial Statements / The Energy Harbinger.

If we look at a micro-cap peer group made up of companies with conventional assets in mature basins, we get an average EV/Reserves multiple of $13.86, meaning on average companies with assets similar to Gale Force’s are valued approximately 44% higher. If we use the peer set multiple on GFP’s reserves of 2.1MMBOE, we receive an implied enterprise value of $29.26MM. If we then subtract net debt/preferred stock we receive an equity value of $18.64MM which we divide by the company’s 65MM shares outstanding to get an implied price per share of $0.29.

The company is undervalued, despite having valuable assets, because it has no financial plan to develop the assets. This is where a company with ICO Fund’s track record can step in and restore confidence to GFP’s shareholders. The company has several other micro-cap oil and gas companies in its portfolio, including AusTex (AOK) and PetroRiver (PTRC), proving that it has ample experience in the industry.

In addition, ICO Fund was instrumental in turning around Long Range Acoustic Device (LRAD) by replacing several board members and renegotiating options held by executives with very favorable strike prices. LRAD’s stock price is now up 51% since May, a tribute to Iroquois’ ability to put the correct people in place on the board and re-incentivize management. If Iroquois is able to reach a similar agreement with Gale Force, I believe it would restore confidence and value to a company that’s in obvious need of direction.

If your plan is to buy low on GFP, you might want to expedite that plan as the record date for its general meeting is October 9. The actual meeting is on November 21, so if you want to support Iroquois, who hired Kingsdale as its proxy, act fast.

GeoSouthern’s Production and Proppant Use are Down in the Eagle Ford

GeoSouthern (private) is one of the companies that pioneered the development of the Eagle Ford Shale. Its primary acreage is in De Witt County’s Black Hawk field (see map below) which is an Eagle Ford sweet spot. To date, the company has drilled and completed (D&C) more than 100 wells in the formation which have produced more than 15 million barrels of oil (MMBO) and 98 billion cubic feet of natural gas (Bcf). That’s $1.7 billion worth of hydrocarbons at $90 oil and $4 natural gas.

Note: Petrohawk’s type curve for the Blawk Hawk field has the following hydrocarbon breakdown: 51% oil, 28% natural gas and 21% natural gas liquids (NGLs). The economic analysis in this piece was conducted using data provided by the Texas Railroad Commission which does not break-out NGLs and shows approximately 50% of the production from GeoSouthern’s wells is oil. To be on the conservative side, I didn’t account for NGLs but know they represent upside to the natural gas price.

GeoSouthern’s De Witt County Wells
GeoSouthern_The-Well-MapSource: The Well Map / The Energy Harbinger.

While GeoSouthern has produced a lot of hydrocarbons from De Witt County, the formation is deep with depths ranging from 12k’ to 14k’ and total depths from 16k’ to 20k’ feet meaning some wells are nearly four miles long. Needless to say, they aren’t cheap to drill and the early wells drilled in this field probably cost in the neighborhood of $10 million.

A well that wouldn’t fall into the $10 million category is Geo’s first well drilled in the Eagle Ford, Migura 1. This well was completed on April 22, 2009 with a 2,780′ lateral and frac’d with 626 thousand pounds of proppant, a very small frac compared to the standards the company would employ shortly thereafter. The well has produced roughly 19k BO and 126 MMcf to date, making it far and away the smallest well the company has completed to date.

Geo D&C 64 wells in De Witt County prior to 2012. These wells were (on average) completed with 4,840′ laterals and 4.5 million pounds of proppant, meaning the company didn’t waste much time ramping up its frac cocktails. These wells have produced an average of 182k barrels of oil (BO) and 1.1 billion cubic feet of natural gas (Bcf). If we assume a price deck of $90 oil and $4 natural gas, they’ve grossed an estimated $20.8 million a piece to date.

Post 2012, Geo has D&C 39 wells which haven’t performed as well as the earlier wells. Peak month oil production is down 38% and these wells produced at a rate of 218 BOPD during their first year, 34% less than the 332 BOPD rate the pre-2012 wells produced at.

While It’s possible the company drilled its best areas first, it’s worth noting the post 2012 wells used an average of 3.8 million pounds of proppant, 14% less than the 4.5 million pounds the earlier wells used. Laterals also decreased 8% to an average of 4,433′ per well from 4,840′ per well. While this undoubtedly decreased well costs, the graph below shows proppant use has a significant impact on production.

Oil Production and Proppant Used per Well
geosouthern_proppant-scatter-plot
Source: Texas Railroad Commission / The Energy Harbinger.

The scatterplot above contains completion data from 82 wells D&C by GeoSouthern in De Witt County. The data shows pounds of proppant used in a well can explain approximately 36% of the variation in its production during the first year. Knowing this, it’s reasonable to assume at least some of the company’s decrease in production can be attributed to a change in completion designs.

Admittedly, bigger isn’t always better. Companies should aim to produce the most economic wells and if that can be accomplished by using lower amounts of proppant, then it’s a good move by the company. I would warn that production  from the later wells fell off 34% during year-one, implying costs would have to fall by a similar proportion for the move to make sense. I highly doubt Geo’s well costs have fallen by $3.4 million during that time frame as companies are reporting costs North of $8.0 million in that area.

The Well Map Beta Testers: We apologize for the delay in the beta but we plan on sending out emails with login credentials for the test early next week. We want the beta to be the best experience possible so we decided to postpone testing until the site was running to our expectations.

-The Well Map Team.

Chesapeake’s Monster Hogshooter Well

A couple months ago I wrote a piece on the biggest wells by formation and I just came across one that should have been in that group. Chesapeake’s (CHK) Thurman Horn SL #406H well, located in Wheeler County, TX, produced at a whopping 6,829 BOEPD during its peak production month. While you might be inclined to think natural gas accounted for much of the production given the area, CHK broke out the hydrocarbon production for the first 8-days as follows, 74% oil, 16% natural gas liquids (NGLs) and 10% natural gas.

Well Name: Thurman Horn SL #406H
Operator: Chesapeake
County, State: Wheeler, TX
Formation: Upper Hogshooter/Missourian Wash (9,915′)
Spud Date: May 1, 2012
Peak Month Rate Oil: 4,801 BOPD
Peak Month Rate Gas: 12,172 Mcfpd
Cumulative Oil: 497,635 BO
Cumulative Gas: 2,112,139 Mcf
Latest Monthly Rate Oil: 249 BOPD
Latest Monthly Rate Gas: 2,395 Mcfpd
Source: Texas Railroad Commission/The Energy Harbinger.

While this is a monster well and might even be responsible for the largest 30-day rate of any horizontal well ever drilled on land, there’s a few things that need to be kept in mind. First, this well is not indicative of other wells drilled in the Texas Panhandle Wash play. Most of the wells drilled in this area are much gassier and produce far less oil. In fact, even as prolific as the oil production has been in this Thurman well, it only accounted for 30% of production during its last monthly rate (compared to 70% during its peak month) which shows us that the oil decline in these wells is very high.

What this well does show us is how prolific the Hogshooter (Missourian Wash) formation can be. CHK and Forest Oil (FST) have both drilled a number of Hogshooter wells that have produced impressive amounts of hydrocarbons. If you aren’t familiar with this zone, a comparison could probably be made to the Lodgepole in North Dakota: A prolific zone in a formation that only exists in certain areas and is very difficult to target. Chesapeake itself has approximately 30k net acres it considers prospective for the Hogshooter zone.

The Well Map Update (8-15-13): Beta Test

The new Well Map site will be launching very soon at the same url (www.thewellmap.com) as the current test site. We’re almost finished with the site and will be releasing credentials for a beta test early next week. If you’re interested in being a beta tester, email braden@thewellmap.com for more information.

As a tester, you’ll be able to access peak month rate and cumulative production data on wells in the Bakken, DJ Basin, Eagle Ford, Mississippian, Powder River Basin, Tuscaloosa Marine Shale and Utica. Your only obligation will be to complete a short survey based on your experience using the site.

-Braden

Map Page Preview

Peak Month (PM) Production
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Cumulative (CUM) Production
The-Well-Map_Front-Page