Updates
Later, 12:49 pm: I finally got a chance to see the linked article in the original post. This is a really nice article, putting everything together in one spot. It is of interest that all of this has been posted in bits and pieces earlier on the Million Dollar Way, some of it quite awhile ago, some of it very recently: a) the CLR graphic on 14 wells on one 1280-acre spacing unit; b) a trillion-bbl Bakken reservoir (903 billion bbls OOIP); c) the lower benches of the Three Forks; d) closer spacing of horizontal laterals; e) KOG's Smokey and Polar pilot projects; and, f) Whiting's six or seven downspacing pilot projects.
Whiting, by the way, provided an interesting data point in their most recent earnings conference call, regarding spacing of horizontals in various locations around the Bakken.
The comments, as usual, are very interesting. XOM has said that their production will actually decrease this year and then increase 2 to 3 percent in the out years; compare that with the production increases expected for the Bakken-centric operators. Today, at Yahoo, the forward P/E for XOM: 11; OAS, 11; KOG, 10; CLR, 13; WLL, 11; CVX, 10, COP, 10.
Disclaimer: this is not an investment. Do not make any investment decisions based on what you read at this site.
In addition, the article did not address cost savings Bakken operators will start seeing this year due to myriad of factors. Having said all that, the linked article in the original post will bring folks up to speed. The author, Richard Zeits, says an article on KOG is forthcoming.
Original Post
A reader sent this in as a comment. It's important enough to re-post as a stand-alone post. Lots of detail, explanations. So many story lines. A huge "thank you" to the reader for alerting me to the article:
The March 5, 2013 Seeking Alpha article by contributor R Zeits entitled, “The Birth Of 'Array Fracking' in the Bakken” Below are a couple of short excerpts from this very long and informative post that indicate why IMHO this is a must read for any Bakken investor.
Bakken: The Downspacing Bounty And Birth Of 'ARRAY Fracking' - Mar 5 2013, 14:41, includes: CLR, COP, EOG, ERF, HES, KOG, MRO, NFX, NOG, OAS, QEP, STO, TPLM, WLL, WPX, XOM
What is the motivation behind the effort to downspace? According to Whiting Petroleum's CEO Jim Volker:
And so the idea here is to drill a series of pilots - and we're going to be doing that in both Hidden Bench, Pronghorn, Sanish, possibly Missouri Breaks as well - to go in and drill on higher densities, essentially doubling the density in the better reservoirs in there, TO DEMONSTRATE OUR ABILITY TO INCREASE THAT RECOVERY EFFICIENCY, get it up from 10% or 11% UP TO SOMEWHERE AROUND 20%.
And what that means is breaking up more rock.
And we don't believe that with the current spacing that we are on, that we are getting all of the oil that's out there. So that's really what this is all about.There are many, many story lines here. I can't even begin to think of all the posts that could come from this article. It looks like I will have a long, long weekend.
The majors, Exxon Mobil (XOM) and Statoil (STO), and super-independents, ConocoPhillips (COP), Marathon Oil (MRO) and Hess Corporation (HES), as well as privately held operators - the companies that account for a large portion of drilling activity in the Bakken - rarely share sufficient details of their operation in the play. However there are multiple indications that the downspacing evaluation and deeper Three Forks testing by this group of companies is also ongoing.
See http://seekingalpha.com/article/1248431-bakken-the-downspacing-bounty-and-birth-of-array-fracking for the full article.
But to just get started: remember in the early days of the Bakken boom, folks were talking about 1 - 3% recovery? Among the amateur sites, MDW was one of the first to note that recovery looked a lot closer to 8% based on corporate presentations. Whiting confirms that in this conversation, suggesting they are already at 10%, and looking to 20%.
That would be doubling their recoverable reserves.
XOM analyst day just finished the Bakken minute. It is tiny in their world.
ReplyDeleteanon 1
Yes, I noted that, but probably in a different article. But, yes, the Bakken is not on XOM's radar.
DeleteTake the CLR reserve estimate x .2 and you talking some real quantities of oil. Give technology another 50 years to evolve and the Leigh Price estimate of 50% recoverable will probably look a lot more realistic.
ReplyDeleteI think folks are coming around to OOIP of 903 billion bbls in the Bakken; that number has now been out there for quite some time, and there has been no pushback of which I am aware. In fact, that's the reason for the new pilot projects mentioned in the article.
ReplyDeleteFor simplicity, I round 903 billion bbls to one trillion bbls which I posted a long, long time ago.
Now, consider:
a) 1% recovery of that one trillion bbls
b) 2% recovery of that one trillion bbls
c) 3% recovery of that one trillion bbls
d) 5% recovery ...
e) 10% recovery ...
f) 20% recovery ...
Bruce,
ReplyDeleteI like your comparisons of the forward looking PE's. I too don't understand why the market values these Bakken growth companies similar to XOM from an earnings perspective. The only logical explanation that I can up with is the perceived risk that the market must see in these Bakken companies.
Going with that assumption, I don't see risk in the reserve estimates, in fact I see significant upside for all the reasons that you state. "Array" fracking only adds the potential for upside. Early data points from these companies, both what they have stated publicly along with the data that one can see from the NDIC site are certainly positive indicators that we'll see an increase in EUR's as knowledge around the correct spacing evolves.
And then you look at the Lynn Helms discussion around the "gusher" NW of Watford City. Whether that turns out to be a step function in EUR's or not, it illustrates to me that there is the very real potential that a step function could occur in the near future. Certainly a huge financial incentive for the oil companies as well as the service companies to innovate.
There certainly is the risk around regulatory interference in fracking, which should be considered. And there are the macro economic risks that the price of oil could collapse. Hedging helps in the near term, but if prices stay low for too long the hedging won't provide indefinite protection.
I've also read some analyst who worry that the 'break even' point for Bakken oil is quite high. In my view, those analysts have it wrong. They are looking at current returns against current expenditures and concluding that the cost to produce oil is very high. The companies IRR numbers are very strong. If I could get 50%-80% IRR on every dollar I invest, I think I'd be extremely happy.
And then consider cost improvements, differential improvements and additional efficiency gains,and you start to really drive the bottom line figures which only drive the PE down or the share price up.
As always, thanks for all you do with your blog. It is appreciated by many!
Great comment. Thank you. I will probably move this to a stand-alone post and comment there. I've wanted to do a short piece on exactly what you've brought up but never got around to it. Maybe this would be a good place to start. Thank you.
Delete