$17,000/Mineral Acre in the Bakken -- Too Much To Pay? -- LINN Energy

Update

Actually this is not an update per se. Rather, I have been thinking about this and determining the amount paid per acre is problematic. 

Here are the facts and one assumption which I think is pretty close to factual:

• LINN Energy paid $194 million for the Concho assets
• Most likely the assets included about 11,193 acres = 17 sections
• Most likely the assets included 2,000 bopd production

Now for assumptions. At 200 bopd/well (and this figure could be all over the map), this amounts to about 10 net producing wells.  Ten wells on 17 sections certainly sounds plausible.  And/or Concho very likely could have working interest in wells on non-leased acreage.

Ten Bakken wells could conservatively have 400,000 bbls EUR. At $65/bbl = $26 million. Ten net wells = $260 million. One could argue, that if LINN Energy picked up 10 producing wells, they could be worth as much as $200 million over the life of the wells. And, of course, the wells hold the acreage leases by production.  Without knowing how many wells, and what kind of wells were included in the acquisition, it is impossible to determine the price LINN Energy paid for the 11,193 acreage.

For that reason, I am changing my mind once again, and going back to $12,000/acre as the record amount paid for Bakken acreage in this boom.

Original Post

This past week it was announced that LINN Energy will buy into the Bakken, paying $194 million for Concho Resources assets.

Unless I missed it, I was unable to find the number of acres that were acquired by LINN Energy in this transaction or the other assets, including producing wells.

Based on the 2009 Annual Report, Concho Resources had 11,193 acres in the Bakken/Three Forks.

Dividing $194 million / 11,193 acres = $17,332/acre. Someone with more current information suggests the price was closer to $16,500/acre.

The previous record was $12,000/acre in the North Dakota Bakken.

Until new information regarding the LINN/Concho is forthcoming, I will consider $16,000/acre the new record for ND Bakken/Three Forks acreage. [Based on the first comment below, and re-thinking this, I will change this to $13,000/acre as the new record.]

[See first two comments below: if LINN Energy bought 2,000 boepd production in the Bakken, that amounts to about $48 million / year at $65/bbl, bringing the per acreage cost down significantly.  Then it is closer to $148 million/11,193 acres = $13,000/acre.]

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The question is whether this makes sense.

Of course, we don't know where the acreage is in the Bakken and most agree that some areas are better than others.

Having said that, some observations.

First, the simplest of observations:

• Most agree that EURs for Bakken wells will be about 500,000 bbls
• If one assumes the price of oil at the wellhead will average $65 --> $32.5 million for the EUR
• If one well is sunk into a 640-acre spacing unit, that $32.5 million --> $50,000/acre

Now, some observations derived directly from the first observations:

• Depending on the location of the wells, some Bakken wells have EURs of 750,000 bbls
• $65 at the wellhead for sweet oil seems conservative
• It is likely that more than one well will be sunk into every 640 acres in the ND Bakken

The edge of the envelope in 2011:

• WLL is placing up to eight horizontals in their better 1280-acre units (current presentation)
• Zenergy wants to create a 3840-acre unit for 9 wells (426-acre) (February hearing docket)
• CLR wants to place 7 wells on a 640-acre unit (February hearing docket)

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For conversation, some further commentary.

I don't like the cliche, "this time things are different."

However, in the case of the Bakken and horizontal drilling, I think there one can make a case that things ARE different this time.

Some background: in the "old days," it is my understanding that vertical wells could have a spacing unit as low as 40 acres. I assume some vertical wells had spacing units of 640 acres, but I don't know.

In the "old days," there were a certain number of "dry" wells. 

Once a well is producing, and as long as it is producing, the lease remains in effect, i.e., the lease is held by production.

Generally speaking, leases do not specify formation.

Therefore, in the "old days," a single vertical well, as long as it was producing, might "control" 40 acres, or as much as 640 acres (one section). 

With the Bakken, I think there are some significant differences:

First, there are "no" dry wells. It happens, but it's rare. Anyone acquiring acres in the Bakken can assume that a well is likely to be productive. It may or may not be a "good" well but it will be productive.

Unlike vertical wells which had spacing units as low as 40 acres, all horizontal Bakken wells will have a minimum of 160 acres; some 320 acres; most, or many, 640 acres; and many, or most 1280 acres. I can't imagine a horizontal well being less than 160 acres. But those smaller units will generally come after the larger units have been drilled, or they will be special circumstances based on geography.

So, now, here comes the "this time things are different":

When someone acquires a lease in the Bakken and drills a well, he/she is almost guaranteed it will produce at least something. Right now, the good wells are paying for themselves (at the wellhead) in 1.5 years; the less good wells taking as long as 3 years. But the wells now "hold by production" 640 acres or 1280 acres for all eternity (the wells are expected to produce for 30 years, and for me, at my age, that is "for all eternity). To me, that is incredible. One well will "hold by production," 1280 acres of future activity.

During the next 30 years, these are my expectations:

• the price of oil will not fall (inflation, weakened dollar, peak oil, supply/demand, political unrest in Middle East)
• exploration and production technology will  improve --> increased production/unit 
• producers will go back in and re-frac (the early wells were fracked with a single stage; they will all be re-fracked; newer wells will eventually be re-fracked)
• producers will go back in with horizontals into legacy formations and new formations (Tyler/Heath, Birdbear/Nisku) from existing Bakken/Three Forks wells

I don't know if $17,000/acre is too much to pay for a mineral acre in the North Dakota Bakken. Obviously the LINN Energy folks don't think so. Will this be the end of appreciating prices paid for Bakken acreage?