May 10, 2019: in the original post below, I opined about the CEO's comment that the rate of return was infinite on "parent-well-uplift" production. I thought that was a bit of hyperbole.
Having thought about that, technically speaking, he is absolutely correct. The rate of return associated with that well was based on projections and actual production from the well without extra production as a result of the "halo" effect. If one continues to separate all those costs / the rate of return from "halo" production, then, yes, of course, the rate of return is infinite. That production was never anticipated; it was never factored into the original rate of return. The real question, of course, does it "move the needle"?
From a reader:
Link to slides here. Look at slides #18, #19, and #20, to "parent well uplift" ("halo effect").Whiting's latest investor presentation - slides #18/19/20 - show graphically halo effect on older wells.Whiting's suits use the phrase 'parent well uplift'.Should you go through the conference call transcript (available through Seeking Alpha), you will find several questions from the seemingly surprised analysts about this.
SeekingAlpha transcript: https://seekingalpha.com/article/4259314-whiting-petroleum-corporation-wll-ceo-brad-holly-q1-2019-results-earnings-call-transcript?part=single.
I haven't had a chance to do this yet, but am eager to see how this is presented. Again, a huge "thank you" to the reader for bringing this to my attention.
At least for the time being, I will probably still use the "halo" effect tag.
From the Q & A:
Question from Mike Kelly, analyst:
Thank you. Good morning, guys. I was hoping you could frame the benefit of this kind of parent well uplift phenomenon that you're seeing. And maybe if we could just kind of look at that from what this could potentially do to EURs maybe as a combined child well plus the added benefit here from the incremental production you'd see from the parent well?Answer from CEO, Brad Holly:
Or maybe from a returns perspective, just take a 50% IRR up to potentially 60% or 70%. Just so looking at these slides, I mean it's pretty amazing to see the uplift on Slide 20 for example. But if you could just frame just what the ultimate benefit could look like?
Yes. Mike, thanks for the question and thanks for pointing that out. Slide 20 really shows there's a typical Bakken well, that's formed for five years and it's on the definite trend and it's made over 200,000 barrels of oil. And we go in and complete three offsets and the offsets are 250% better than the original well. And that's after 180 days.I assume "infinite" was a bit of hyperbole. Perhaps a better word, or phrase: "... the rate of return on any given parent well is unknown but could certainly be significant."
Again to Chip's points on the opening we're not basing this on 30-day IPs. I mean this is substantial production and we're seeing the parent just take off. This is one of the better examples on Slide 20 where we show a couple of others in the packet. So we're seeing different performance. It's not all the same. It's variable how it's hitting the parent wells.
But I think Mike what it highlights is that the original Gen 1 and Gen 2 completions were very poorly done in the space and were not contacting enough of the rock around it. And so the newer Gen 4, Gen 5 completions are very efficient or actually touching rock that was never touched before. And so we do believe it is incremental production.
And the rate of return on the parent wells is infinite. And -- but if you tuck that on to the economics of the investment dollars that we're spending, it's significant. I mean we think it's a 10% to 20% uplift probably in the IRR right now. But we're still -- it's early times and we're watching all that. But we're extremely excited about what we're seeing.