The QEP North Dakota Bakken Acquisition, Summer, 2012, Helis/Black Hills Corp/Unit Corp Conference Call

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I think anybody seriously interested in the Bakken should listen to the QEP conference call regarding the recent $1.4 billion deal involving Helis, Black Hills Corp, and Unit Corp. The slides are also available. Access is very, very easy. Simply go to the QEP website. At the sidebar on the left at the QEP website, at the very top are two links. Open the slide presentation first and have that ready to go. Then open the webcast itself. Anyone can listen.

Before beginning my comments on the webcast, I am convinced that the maps provided by QEP on slides 4 and 5 of the wells drilled in the middle Bakken and the Three Forks do not match the NDIC GIS map server. It has to be my problem; I can't believe they wouldn't match, but I don't see it. Two problems: the well sitings; and, the directions of the horizontals seem to be going in the wrong direction, almost a mirror image of the GIS map server. And even taking that into account, the wells seem not to be sited in the correct sections. First of all, I am probably wrong on this. But if I'm correct, my hunch is that they overlaid the section/township grid and placed a pictograph of the wells on top of the grid; when they did that, the pictograph did not end up quite right nor in the right perspective. In the big scheme of things it does not matter, but if one wants to match well names with EURs, it won't be possible with those slides. Again, I assume I am doing something wrong, or looking at it incorrectly.

I listened to the webcast one time through with minimal disruptions, but an edited "official" SeekingAlpha transcription would be nice.

Some data points and comments

This was a $1.38 billion deal. I posted that correctly from the beginning, but I believe I have incorrectly referred to it as a $1.3 billion deal subsequently. For all intents and purposes, it's a $1.4 billion deal and for a 30-second soundbite, it's one-and-a-half billion dollars. Pretty big deal.

When I first heard the number of acres involved, I was somewhat surprised. The number "27,600" is actually a pretty small number when talking about the Bakken, but it doesn't really sink in how small this net acreage is until you look at the maps. For all intents and purposes gross acreage adds up to about 3 townships in the Bakken:

• 149-95: all 36 sections (23,040 acres)
• 150-95: almost all; omits sections 5,6,8,9, and 17 (19,840 sections)

In five other townships, 5 - 8 sections each:

• 149-94: 6 sections (3,840 acres)
• 150-94: 6 sections (3,840 acres)
• 150-96: 5 sections (3,200 acres)
• 149-96: 8 sections (5,120 acres)
• 151-95: 6 sections (3,840 acres)

Since this totals more than the stated net acres, not all acres in all/some sections are part of the deal (unless I read the map incorrectly, or did the math wrong).

One section is 640 acres, so 27,600 acres is about 43 sections. A township is 36 sections, so the net acreage of this deal is about one township. If my math is correct, $1.38 billion/43 sections --> $33 million/section. There's gonna be a few more North Dakota millionaires next year. 

Based on the conference call, I believe QEP paid only for acreage and existing wells, not rigs, personnel, or other "assets." Again, I don't know for sure.

If so, one really can sort out the price paid/acre pretty easily: total price minus the cost of drilling the current wells and minus the income from the current daily production from existing producing wells.

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When looking for acreage to buy, QEP said they focused on 7 things:

1) oil
2) tight sand and tight carbonation sands (not shale)
3) the "sweet spots" in the Bakken
4) stacked reservoirs
5) close to where QEP is already working
6) chunky, contiguous blocks
7) private, not government, land/minerals

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Expanding on the above, their comments/my comments:

1. Oil:  QEP is a natural gas company. I think they said that about 11% of their boepd comes from oil and natural gas liquids. QEP sees the writing on the wall; they need "black oil" as the CEO said. I missed this part of the discussion (and I'm not going to go back and re-listen to the whole presentation to get the few data points I missed) but it sounds like this acquisition "moves the needle a bit" for QEP but they are still a natural gas company. We will see how far the needle moved after this acquisition in the 3Q12 corporate presentation. QEP says they were informed that the deal will not affect their credit ratings. QEP said they can pay for this acquisition through their revolving credit facility and cash flow, which means they can still buy more oil acreage somewhere.

2. Tight sand and tight carbonation sands (not shale): This is a very, very interesting statement. It is my understanding that the upper Bakken is shale, and most Bakken-centric operators have avoided that formation for now, though I have posted rumors that Slawson is interested in testing the upper Bakken. I did not know this was such a big deal, but it was the second point that QEP listed as one of the seven things they focused on.

3. Sweet spots: Sweet spots are mappable and predictable. I think some folks, including me, when being told back in 2006 - 2007 that the Bakken was a continuous reservoir (in fact, not only a continuous reservoir, but the largest continuous reservoir ever discovered in the continental US) thought the Bakken would be uniform throughout. But a day-in, day-out posting of IPs, mapping the location of the wells day-in, day-out, told me early on there were sweet spots in the Bakken. I noted that Whiting inserted a new slide into their corporate presentation (see June 5, 2012, post) that depicted "sweet spots" in the Bakken. Mike Filloon talked about "sweet spots" on May 16, 2012); and, one last example: the November 16, 2011, post about NOG.

One of the things I found most interesting in this QEP conference call was all the time spent on "sweet spots." A lot was said (and some things unsaid or skipped over quickly; more on those things later) but a "very lot" was said about sweet spots. I have referred to the Helis Grail as the Holy Grail; there are no better sweet spots (some as good, but none better, is my guess).

The EURs for wells in the area under discussion: 1 million bbls, in both the Three Forks, and the Bakken.

QEP said "they" could map the sweet spots in the Bakken; there was a long discussion on this issue, and maybe later I will expand on this, but the bottom line: if QEP can map the sweet spots in the Bakken, the other operators can do so also, and so can the analysts.

Oh, wow, so many story lines. I just thought of several more story lines from this one issue, but have to move on.

4. Stacked reservoirs: QEP was looking for acreage that had both middle Bakken and Three Forks. QEP noted, and I also noticed, that Helis was targeting the Three Forks in this area. I did not understand the next comment, but QEP said something to the effect that Helis drilled to the lower formation in its haste to hold leases by production. There are a couple of ways to interpret that; I find it interesting that the analysts in the Q&A period did not follow up on this.

5. Close to current QEP operations: makes sense; intuitive; not much more needs to be said. But...

6. Operated contiguous chunky blocks: provides economy of scale; the the phrase heard most often in the presentation (second only to "sweet spots") was "pad drilling." Chunky blocks of acreage allow for pad drilling.

7. Private land: QEP really liked areas where surface owners were also royalty owners (duh) and they really, really like private land as opposed to federal land (a bigger "duh," if anyone has been following the discussion regarding BLM regulation of fracking;discussion period to end in September; President Obama likely to be re-elected in November; the writing is on the wall). The acquisition is outside the reservation where QEP's current operations are located.

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Question and Answers

The first question had to do with rig counts. QEP has 3 rigs in its current acreage (inside the reservation). There are 2 rigs in the newly acquired acreage. QEP will maintain that total (5 rigs: 3 outside; 2 inside new acreage) for the rest of the year, but then in 2013 will ramp up to 5 rigs in the new acreage. Of course that begs the question. They may have addressed it but if so I either missed it or forgot to write it down. I think I recall but ...

It was in response to this question that QEP also talked about the permitting process. QEP did not cite numbers but talk on the street says North Dakota can issue a permit in 10 days vs the 300 days it takes for the feds to issue a permit. Three hundred days is almost 8 times longer than Moses spent on Mt Sinai when he was given the Ten Commandments (that might be the best analogy in this post). Three hundred days comprises four earnings periods, four conference calls ("We're still waiting for BLM approval...We're still awaiting for BLM approval...We're still waiting...well, you get the point).

The second question had to do with monetizing other assets to help pay for this acquisition. I touched on that above: the company will not monetize assets to pay for this acquisition but that doesn't mean they won't monetize some assets. It was very clear, at least to me, that QEP plans to sell some non-core and/or non-crude oil assets based on how this question was answered.

Then this softball question: is QEP "done" in the Bakken in terms of looking for more Bakken acquisitions. You can listen to the webcast to get their answer. If you really don't know or can't guess, write me.

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Other questions/answers

Well design? This was huge, a great question. QEP said exactly what I have believed to be true. I think I have talked about this before.  Helis uses 100% ceramics in their fracking. QEP uses no ceramics in their fracking (at least that's what I thought QEP said); they use resin-covered sand. QEP was very, very clear in stating that they felt ceramics added nothing -- repeat, nothing -- to the "early life" (12 - 24 months) of a Bakken well. Whether ceramics are beneficial at all, according to QEP: "the jury is still out." My hunch: look for future wells drilled by QEP in the Grail (at least at first) to be fracked without ceramics. (I hope we haven't seen this movie before: Anschutz --> OXY USA).

Cost of wells? This was a bit muddy, but I think this is an accurate paraphrase. QEP wells in the reservation cost $11 million/well without ceramics. They think they can get a million dollars in savings by eliminating ceramics on a long lateral. Pad drilling and other scales of economy will bring the cost of wells down, but we are still talking about $10 million wells.

[An aside: QEP said they incur a huge cost for their reservation wells due to how much water needs to be trucked in; they alluded to some potential cost savings regarding water, but not expanded upon. I have posted some thoughts on water recently.]

320-acre spacing? I must have missed this, but apparently QEP's analysis of the economic return is based on 320-acre spacing. When asked about the "due diligence" employed by QEP in arriving at 320-acre spacing, I had two immediate thoughts: a) what an insulting question; a $1.4 billion deal and someone is asking about "due diligence." b) what was QEP's answer going to be?

QEP provided an outstanding look back at wells from 2008 to 2010 and from 2010 to current wells. By the way, there's an excellent article at the Oil Drum on oil diffusion in the middle Bakken and it supports my view that horizontals will be placed more closely together, something I've been saying for years. This discussion on "modern" wells is where QEP expanded on the $11 million cost of "modern wells" and where savings might be found.

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Miscellaneous comments from Q&A near the end

Surface to TD, most recent QEP long lateral, 22,000 feet: 19.5 days. Twenty-two thousand feet is a long, long lateral. When I first started blogging, a long lateral could be as short as 17,000 feet or so, if I recall correctly, but don't hold me to that. But 22,000 feet is approaching the number that used to be called "records." And, in 19.5 days. With dedicated frack teams, there will be less delay between reaching total depth and completing a well.

Backlog? Does QEP have a backlog? I think, based on the answer, the analyst was asking whether QEP had a backlog in wells that had been drilled but were waiting to be fracked. That, too, was a great question and put a different perspective on what Lynn Helms says and how I have interpreted his comments (often, wrong).  QEP said they do not have a backlog of wells that need to be fracked, but then immediately re-phrased: yes, some wells are operationally constrained. When pad drilling, the rig drilling a new well can be sitting directly over a previously drilled well. They cannot frack until the rig is off the pad, or at least until the rig is off the the completed hole. My hunch is that operators in general won't frack wells on a pad until the rig is off the pad. Besides being too confusing in a too-confined space, if there is a mishap ("fire") the rig is one more asset to be lost. Great question, great answer; more insight into what the "backlog of wells waiting to be fracked" means.

Enough for now. There may have been some more points worthy of discussion. There are certainly a lot of story lines that can be taken away from this. I will probably do that at a later date.

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Disclaimer

This is for my own personal use but I post it in hopes that folks will clarify what I missed or don't understand.

There are typographical errors; I did not proofread.

I am a layperson; I don't have formal training in any of this (not even for blogging, much less oil and gas).

I listened to the presentation only once and took notes as I went along. I know I missed some things, and certainly misunderstood other things, and made mistakes when taking notes.

My comments/opinions are interspersed with comments made during the conference call.

If something doesn't sound right, it probably isn't. Trust but verify. Listen to the webcast.

Make no investment decisions based on anything I post at this blog. This is not an investment site; it is posted for my own use to keep track of what is going on in the Bakken. I post it for others interested in learning about my perspective of the Bakken, and for entertainment purposes.