Eight New Permits; Fourteen Permits Renewed; Seven DUCs Completed; DUCs In General; Cheap Wells: EURs; Advantaged Oil; And, All That Jazz -- October 21, 2019

Updates

October 22, 2019: I have removed an item from the original post -- something I almost never, never, never do. See first comment.

Original Post

Focus on Fracking: the weekly note has been posted. Link here. I bet you can't read it in five minutes.

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

Operators: I have not posted it, but I've long thought that once we see operators like Zavanna and Newfield get back in the game, "something is up" -- and they've gotten back in just before winter sets in; they're not getting these permits to hold them until next July.

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:

• earnings
• growth in reserves

Does anyone even care about growth in reserves any more? "Everybody" is clamoring for short-term gain. Screw the 20-year horizon. If it looks like XOM is going to run out of oil, investors will jump ship and buy AAPL. They just hope they are at the front of the line when they sell.

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 then 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

Existential. Saudi Arabia cannot survive on $60 Brent; nor will most US oil companies "thrive" on $50-WTI. And if they can't "thrive," their only hope is to "survive." And to "survive," they need to convince their investors and their bankers they will remain solvent, surviving long enough to get them to the next boom (hope springs eternal). The only way US oil operators will "survive" this environment (the first two scenarios) is to have free cash flow beyond expectations. It's my hunch that's exactly what Harold Hamm is thinking.

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, daily rates must be coming down very fast. 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.

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.

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Active rigs:

$53.51	10/21/2019	10/21/2018	10/21/2017	10/21/2016	10/21/2015
Active Rigs	62	71	54	34	68

Eight new permits, #37098 - #37105, inclusive (note: milestone, 37100th permit)

• Operators: Newfield (5), Zavanna (3)
• Fields: South Tobacco Garden, (McKenzie); Poe (McKenzie)
• Comments:
• 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;

Fourteen permits renewed:

• EOG (6): six Hawkeye permits in McKenzie County;
• Oasis (4): two Wren Federal permits in Williams County; two Nikolai Federal permits in McKenzie County;
• Hunt Oil (3): two Trulson permits in Mountrail County; one Halliday permit in Dunn County;
• Nine Point Energy: one Novak permit in McKenzie County

Seven producing wells (DUCs) reported as completed:

• 35703, 1,572, PetroShale, Thunder Cloud 2TFH, McGregory Buttes, t8/19; cum 23K over 24 days; spacing: 320 acres;
• 33010, 1,391, PetroShale, Petroshale US 12H, Antelope-Sanish, t8/19; cum 13K over 10 days; spacing 1280-acres;
• 35700, 1,008, PetroShale, Thunder Cloud 1MBH, McGregory Buttes, t8/19; cum 19K over 22 days; (18017 -- 9,000 bbls in one day, 7/19); spacing: 320 acres;
• 35701, 840, PetroShale, Thunder Cloud 1TFH, McGregory Buttes, t9/19; cum 21K over 23 days; spacing: 320 acres;
• 35702, 1,528, PetroShale, Thunder Cloud 1MBH, McGregory Buttes, t9/19; cum 24K over 24 days; spacing: 320 acres;
• 34124, 3,000, QEP, Vegas 2-1-36TH, Spotted Horn, t9/19; cum --; (17261-PA; 17260 -- off line; 17197 -- inactive since 8/18); spacing: 4 sections;
• 34125, 2,400, QEP, Vegas 3-1-36BH, Spotted Horn, t9/19; cum --; spacing 4 sections;