Expiring Leases -- DNR As Third Example -- Bakken, North Dakota

The scuttlebutt is that expiring leases could appreciate 10-fold in the Bakken at the end of this year.

Now that annual reports are out, one might be able to find out to what extent one's favorite company is at risk with regard to expiring leases.

Unlike CLR and OAS, Denbury (DNR) does not break out the exact number of net mineral acres that could be lost at the end of the year if not producing.

DNR breaks it out by percent, and does not break out individual areas. Instead, DNR simply reports that 31% (in 2011), 20% (in 2012), and 13% in (2013) are subject to loss if not producing, and that is for their entire Rocky Mountain prospect.

DNR reports that it has 275,000 net acres in the Bakken. Applying those percentages across the board (which is subject to all kinds of problems, but nonetheless, that's all we have), DNR is subject to lose the follow number of net acres in the Williston Basin Bakken if not leased by the end of December of the corresponding year (numbers rounded):

• 2011: 85,000 acres
• 2012: 55,000 acres
• 2013: 36,000 acres

DNR currently has a 5-rig drilling program. (Before the merger with Encore, DNR had a 2-rig drilling program in the Bakken.) Therefore:

• 2011: 85,000 / 1280-acre units = 66 wells for 5 rigs --- more than 12 wells/rig
• 2012: 55,000 / 1280-acre units = 42 wells for 5 rigs 
• 2013: 36,000 / 1280-acre units = 28 wells for 5 rigs

Compared to CLR, DNR has significantly more acres/rig at risk, if assumptions are correct. But it does not appear to be excessive.

After completing these statistics for three companies (OAS, CLR, and, now, DNR) it appears there is a lot of talk about losing leases due to lack of activity but it appears that these companies are well positioned.

I wonder if a company with a unique business model (NOG) that has less control over its future, is at more risk of losing leases. NOG counts on other operators drilling on their leased acreage.


For CLR's expiring net leases, click here.
For OAS's expiring net leases, click here.

Another Man-Camp Proposed in the Bakken, North Dakota, USA

Link here (regional links break early and break often).

The proposed man camp would be about seven miles southwest of Dickinson, and serve 100 - 400 men.

If approved, it would be the first man-camp in Stark County.

Whiting has increased its interest in Stark County, and in February, 2011, Empire Oil paid the state $9,600/acre for 460 mineral acres in Stark County, in the Elidah field, and probably to target the Tyler formation.

Expiring Leases -- CLR As Second Example -- Bakken, North Dakota, USA

The scuttlebutt is that expiring leases could appreciate 10-fold in the Bakken at the end of this year.

Now that annual reports are out, one might be able to find out to what extent one's favorite company is at risk with regard to expiring leases.

CLR has the following amount of Williston Basin leases expiring as of December 31 of the corresponding year (numbers are rounded):

• 2011: 100,000 net acres
• 2012: 124,000 net acres
• 2013: 214,000 net acres

CLR has about 24 rigs in the Williston Basin (22 in ND and 2 in MT)

• 100,000 / 1280-acre spacing = 78 wells / 24 rigs -->  3 wells/rig/year -- obviously not a problem
• Unless my calculations are wrong, or I have incorrect data to begin with, CLR has plenty of capacity

Compare with Oasis' expiring leases.
Compare with DNR's expiring leases.

Expiring Leases -- Oasis As First Example -- Bakken, North Dakota, USA

The scuttlebutt is that expiring leases could appreciate 10-fold in the Bakken at the end of this year.

Now that annual reports are out, one might be able to find out to what extent one's favorite company is at risk with regard to expiring leases.

On page 38 of the printed copy of the Oasis annual report, and on page 44 of the 130-page electronic copy of the Oasis annual report, this:

Our acreage must be drilled before lease expiration, generally within three to five years, in order to hold the acreage by production. In the highly competitive market for acreage, failure to drill sufficient wells in order to hold acreage will result in a substantial lease renewal cost, or if renewal is not feasible, loss of our lease and prospective drilling opportunities.

Unless production is established within the spacing units covering the undeveloped acres on which some of the locations are identified, the leases for such acreage will expire (numbers are rounded).

• As of December 31, 2011: 54,000 net acres will expire
• As of December 31, 2012: 24,000 net acres will expire
• As of December 31, 2013: 42,000 net acres will expire

Oasis notes that the cost to renew such leases may increase significantly, and we may not be able to renew such leases on commercially reasonable terms or at all. In addition, on certain portions of our acreage, third-party leases become immediately effective if our leases expire ("top leases"). 

How much did expiring leases cost Oasis in past years? Non-cash impairment charges, as follows:

• 2010: $12 million
• 2009: $5 million
• 2008: $1.6 million

Back-of-the-envelope calculations: 54,000 / 1280-acre spacing --> 42 wells. In addition, Oasis might have other wells that they might want to get to first. Regardless, they have 7 rigs and that works out to 6 wells for each rig this year. There is some discussion regarding this issue, but there is some suggestion that a lease will be held if the pad is at least started; others will take issue with this.

Request for Assistance

I don't have time to check every annual report of Bakken companies, so maybe others could help. If you have a favorite Bakken company, and have a copy of their annual report (electronic copies are available at this site; see top of sidebar at the right), see if you can find the numbers and send them to me via comments or e-mail. Please include page of the report, so I can verify or add clarifying statements.

Compare with CLR's expiring leases.
Compare with DNR's expiring leases. 

Investment Guide to the Natural Gas Industry

Eric Fox over at Investopedia.com recently posted a nice investment guide to the natural gas industry.

This guide will be linked at the natural gas tab (NG) at the top of this blog.