Disclaimer: in a long note like this, there will be factual and typographical errors. This is a commentary which means opinions will be interspersed with facts and one may not notice the difference. I am inappropriately exuberant about the Bakken.
Observations: each one of these observations by themselves means nothing, but taken as a whole -- there may be a pony --
- the number of active rigs in North Dakota has gone from the low 50s to 62 in the past couple of weeks;
- North Dakota production, oil and natural gas hit all-time production records, two months in a row; natural gas production has been setting new production records for quite some time now;
- WTI is holding at $53/bbl despite huge inventory builds over the past few weeks;
- the natural gas inventory nationally is at record highs; North Dakota breaks the 3 billion cfd natural gas threshold and is improving on capture;
- the Bakken wells are nothing short of spectacular; the only reason the national press has not noticed (well there are two reasons):
- fossil fuel production is not part of their narrative
- "the frog in a warming pot of water on a stove" metaphor
- operators in addition to CLR, WLL, MRO, WPX are starting to get active again: EOG, Zavanna, Oasis, Newfield; today, e.g., eight new permits -- Zavanna and Newfield
Better wells: we are seeing more and more "ideal wells" in the Bakken -- my definition of an ideal well is a well that pays for itself in six months and then continues to out-perform, providing a steady stream of income for 35 years.
EUR-type curves: interestingly enough, we don't see much talk about EURs any more? Maybe I'm not paying attention, but if that's true, it's probably because investors -- and operators are really listening to their investors right now -- could care less about EURs; investors want to see short-term gains; great cash flow;
Value: in fact, the traditional way of valuing Big Oil operators (XOM, CVX, COP, etc) may be changing. We used to value a Big Oil company on two things:
- growth in reserves
Saudi Aramco: exhibit A. Is anyone valuing the IPO on growth in reserves? LOL. There will be no growth. Unless Saudi Aramco starts buying up "plays" overseas, their reserves remain flat. Saudi Aramco? Investors are only interested in the company's return, and I, for one, don't see much growth (see disclaimer). Their money will be in refined products and petro-chemicals (plastics and fertilizer).
Bakken operators: about two or three years ago, maybe more, it was obvious that the geographical footprint of the Bakken was relatively small; even though folks said there it would take another 20 years to drill out the Bakken and the Bakken wells would continue to produce through 2100, the writing was on the wall. The Bakken, as good as it was, was finite. And that "finite" looked to be only five to ten years out? What's a Bakken operator to do? There were two schools of thought: some operators over-spent, bet the farm, and followed the herd to the Permian, only to find out that at $50-WTI the numbers don't work. Other operators kept to their knitting, focused on the Bakken. [How Whiting could have such a bad 2Q19 earnings report is beyond me -- but that's another story for another time.] So, we'll see how this plays out.
CLR: seems to have taken the second option -- focus on the Bakken. But they took it one step farther -- damn the torpedoes, full speed ahead. Wow, CLR is on a tear. Some of it is obvious -- the Long Creek Unit, for example -- but I'm going through every permit issued so far in 2019, and it is quite amazing to see what CLR is doing. And that leads us to 2020, July, to be exact.
July 20, 2020: four scenarios:
- WTI is falling and falling fast, trending toward $40-WTI: 50% chance
- WTI is in a $50 - $55 trading range: 40% chance
- WTI is moving and trending toward $60: a 9.9% chance
- WTI is surging and trending toward $100: 0.1% chance
Wells have never been so cheap to drill, at least in the Bakken, as they are now. I'm also thinking that's what Harold Hamm is thinking. Infrastructure bills have been paid; up-front leasing money has been paid; drilling to depth is taking seven days and rig operators are laying down rigs so fast, they have to be giving huge discounts. Likewise, oil service operators, like Schlumberger and Halliburton, are probably offering DOGOFF deals. On top of that, maybe there is sand in North Dakota. The parent-daughter phenomenon ("advantaged oil" as Phillips 66 and BP call it) is truly unexpected.
DOGOFF deals: deals offered by oil service companies in which they will drill one at "going" rates and offering to drill a second one fast after the first one for free: "drill one, get one free, fast" or DOGOFF.
DUCs: it's my impression that DUCs are being completed more quickly than in the past. It's all anecdotal, but looking at the 2019 permits, it certainly appears DUCs are going to CONF and then reporting more quickly than what I'm used to. Remember, before DUCs came along, wells had to be completed within a year. Due to the Saudi Surge, NDIC allowed operators to shut in a well for two years before completing them. If operators are looking for free cash flow (see above) the DUC interval is going to become shorter. Argument against: in the latest Director's Cut, only 72 wells were completed in the most recent reporting period; generally about 120 wells are completed.
Bullish on the Bakken? There will be winners and losers. My hunch: mom-and-pop mineral owners will always be winners; most of them got their minerals for nothing, inheriting them from their homesteading grandparents. CEOs, CFOs, will always be winners. Even companies facing bankruptcy need CEOs and CFOs. Maybe even more so. Workers, as long as they stay employed, will be winners. Investors? I've talked about them before.
Back to the Daily Report
Eight new permits, #37098 - #37105, inclusive (note: milestone, 37100th permit)
- Operators: Newfield (5), Zavanna (3)
- Fields: South Tobacco Garden, Poe
- Newfield has permits for a 5-well Obenour pad in section 21-150-99, South Tobacco Garden
- Zavanna has permits for a 3-well James pad in section 3-151-100, Poe oil field;