Wednesday, January 29, 2014

$34,000 / Acre In The Bakken; January's BLM Minerals Lease Sale -- January 29, 2014

KXNET is reporting:
The Bureau of Land Management says its most recent sale of oil and gas leases in North Dakota totaled more than $17.5 million.
BLM says 40 federal leases were sold Wednesday.
The agency says Williston-based Diamond Resources Co. submitted a record high bid of $34,000 for each acre in a 53-acre parcel in Mountrail County.
Diamond Resources also purchased the highest single-parcel bid at more than $5 million for a 152-acre parcel in Mountrail County.
Let's do the math: $5,000,000 / 152 acres = $32,895/acre (rounded). 

At least three story lines come from this:
a) now we know why holding leases by production is so important;
b) if the acreage is worth this much, the Bakken operators are going to show some spectacular profits down the road -- no one paid this much for so little
c) this helps investors understand the value of the shares they hold in Bakken operators
Diamond Resources is probably buying the minerals for CLR.

According to my FAQ page, question 11:
The late summer QEP/Helis deal may have priced "core" Bakken at $30,000/acre (or more). -- August 29, 2012.
I know two people who, when they read this, will be sneezing coffee out their respective nostrils.


The worst case scenario for the sweet spots in the Bakken:
  • 8 wells on 1280-acre spacing (four middle Bakken wells, four Three Forks wells)
  • EURs of 300,000
  • $50/bbl oil 
  • The arithmetic:
  • 8 wells x 300,000 bbls (EURs) = 2,400,000 bbls
  • 2,400,000 x $50/bbl= $120,000,000
  • $120,000,000 / 1280 acres = $93,750 / acre
  • Even with each of the 8 wells costing $10 million, one still comes out to $31,250/acre
However, a couple things to consider:
  • in the best Bakken, EOG, CLR, and KOG are planning on many more than 8 wells/1280-acre unit (see pilot density projects)
  • no one thinks 300,000 bbls for average EURs is even close; across the Bakken, the average is closer to 600,000 (according to CLR) and Mike Filloon says that in the best Bakken, expect to see EURs of 1 million bbls
  • I doubt anyone thinks oil will average $50/bbl over the next 30 years
  • wells are coming down in cost, from $10 million to $8 million
See what $/acre one gets with the following assumptions?
  • 12 wells (still way below the current anticipated well density)
  • EURs of 450K (still way below the average of 600K)
  • $75/bbl (perhaps reasonable)
  • same cost per well

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