Tag Archives: petro river oil

SandRidge’s Mississippian Wells are Improving

The Mississippian Lime has put companies and investors alike on a roller coaster ride during the last couple of years. When SandRidge Energy (SD) and Range Resources (RRC) started hitting big wells such as the Puffingbarger 1-28H and Balder 1-30N (see below), EUR and IRR projections ballooned to 600MBOE and more than 100%, respectively. Subsequent drilling has shown that these wells are more the exception than the rule, leading companies to slash their expectations considerably.

Big Wells in the Mississippian Lime
puffin-balder-misslime-well

Source: The Well Map.

The Lime’s inconsistency has led some companies to leave the play and some to dial back expectations, but there’s reason to believe companies are finally starting to figure out its eccentricities. SandRidge saw production results improve approximately 20% from 2011 to 2012. These results coupled with a decrease in wells costs have increased the economics of the play.

SandRidge began drilling in the Lime in late 2010, meaning their oldest wells have produced for about three years. The company is currently estimating that its wells pay out in two years, so we took a look at their oldest producers to see if those estimations are accurate.

The average well the company turned to production prior to 2012 has produced 26 MBO (thousand barrels of oil), 197 MMcf (million cubic feet of natural gas) and 4 MBNGL (thuosand barrels of natural gas liquids). Assuming $88 oil, $4 natural gas, $40 natural gas liquids and an NRI of 80%, these wells have grossed $2.5 million in two years.

Revenue by Hydrocarbon

Miss_Revenue-by-Hyrocarbon

Source: The Energy Harbinger / Oklahoma Tax Commission.

This data tells us that SD’s early wells didn’t pay out in two years based on a $3.2 million well cost. While that’s an important data point, investors should be more concerned with the results from the next thousand SD wells than the first 100. So let’s compare these results to what we’re seeing from the company’s newer wells.

Average Production by Well During First Year (2011 to 2012)

miss-production-graph

Source: The Energy Harbinger / Oklahoma Tax Commission.
*Natural gas production converted to barrels based on 6:1 energy equivalency.
**Assumes 12% of natural gas stream is NGLs.

While natural gas production has remained flat, oil production by well increased approximately 20% from 2011 to 2012. This is important because oil is responsible for roughly 73% of a well’s revenue. If the 2012 wells continue to produce 20% higher than the 2011 wells, they’ll gross $3 million by their second year. SD is currently modeling sub $3 million well costs for the Lime wells, which means their newer wells are paying back in two years. A two year payback period is on par with most major oil plays in the United States.

At this point, we’re not sure why SandRidge’s newer wells are producing more oil. It could be that the company is able to focus on its better areas after it delineated it acreage or the new frac designs they’ve cited in their earnings transcripts are paying off. Either way, the production improvements make it a stock to watch for the future. To that end, Range is also tweaking its frac designs and has reported strong results in the few wells it has used to test the design.

If you track the Lime, you’ve probably heard of Petro River Oil (PTRC) who held its IPO earlier this year. The company has 85k net acres in the Mississippian and 32k net acres in a heavy oil play in Missouri. It recently attracted outside capital when Petrol Lakes (Chinese investment group) purchased $6.5 million in stock from Petro River. If you like micro-cap stories, these guys have an impressive management team which makes it a stock to watch.

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Verticals could be Key to Mississippi Lime Development

Most people probably associate the present and future of the oil and gas industry with horizontal wells and monster frack jobs in deep formations. That concept is driven by the idea that most of the shallow oil that’s easy to get to has been exploited, leaving deep plays in tight rock as oil’s last frontier. I’d respond to that argument with Lee Corso’s famous line, “not so fast my friend.”

The industry’s technological advances haven’t just improved horizontal drilling, they’ve improved vertical drilling as well. For instance, it’s now possible to drill a vertical well into a targeted zone and fracture the rock similar to a horizontal. This is an effective way to delineate acreage in formations that are characterized by multiple producing strata with “trapped” hydrocarbons like the Mississippian Lime, versus a resource play like the Bakken.

To illustrate this, SandRidge’s (SD) well results on the Western side of the Mississippian are all over the board. They’ve drilled wells like the Puffinbarger 2-28H which produced 51 thousand barrels of oil (MBO) in its peak month alongside a plethora of wells which never topped 1 MBO in a month. Out East it’s a similar story with Range (RRC) whose landmark Balder well produced 19 MBO in its peak month, but it has also drilled a number of wells which won’t top 19 MBO in their first year of production. The results are indicative of a play with high concentrations of oil in small areas “trapped” by faults, synclines, etc. versus widespread oil across a large area.

These companies will tell you it’s a numbers game and the good wells more than make up for the bad ones. Even if this is true and companies are earning an acceptable IRR from their drilling program, is it really the best use of investor capital to be drilling a large number of expensive, uneconomic wells or is there a better way?

Austex (AOK) is a company that’s taking a different approach to the Lime. While the big companies are using data from the Lime’s old vertical wells to “delineate” acreage (the formation has a lot of historical production), it’s drilling new vertical wells with new technology to find oil. Once a high producing area is found, clusters of verticals can be drilled at 20 to 40 acre spacing. It’s early on, but the results of the program (see below) are looking solid.

Austex’ Vertical Well Results
Austex_Results
Source: The Energy Harbinger / Oklahoma Corporation Commission.
1Production results during first six-months of well.
2Natural gas production isn’t publicly available. This number was calculated based on assumption of a 30% natural gas cut during the first 6-months of production.
3Cost per barrel calculated as estimated well cost divided by first six months of production.
4Estimated revenue generated from well during first 6-months of production. Assumed 85$ oil, $3 natural gas and 80% NRI.
5Cletus 20-5, Blubaugh 20-4 and Blubaugh 20-1 all share tank batteries with a second well making actual production from the individual wells difficult to determine. The production numbers shown are averages.

The above table shows Austex’ vertical wells aren’t only consistent but they’re also nearly paying for themselves in six-months. These wells were all drilled in Township 25 North, Range 1 East, Section 20, so it’s obviously a strong section for the company and may not be indicative of results across the play. Austex is a small company and doesn’t have the capital to drill a large number of wells at this point, but it will be interesting to measure consistency on the wells as the program develops. The company has 5,500 acres in this area, known as its Snake River Project, and plans to develop it at 40-acre spacing.

When we contrast Austex’ results with those of Range’s horizontal program in the same area, we see they lack the consistency of the verticals.

Range’s Horizontal Well Results
Range_Results
Source: The Energy Harbinger / Oklahoma Corporation Commission.
1Production results during first six-months of production.
2Natural gas production isn’t publicly available. This number was calculated based on assumption of a 30% natural gas cut during the first 6-months of production.
3Cost per barrel calculated as estimated well cost divided by first six months of production.
4Estimated revenue generated from well during first 6-months of production. Assumed 85$ oil, $3 natural gas and 80% NRI.

Range’s horizontal program boasts results which include the Balder 1-30N which is a best in class well (vertical or horizontal) and the Dark Horse 26-6N which might never recover its original cost. The company is probably drilling these wells to hold its Mississippian leasehold which consists of 160k net acres, so it’s not necessarily targeting its best acreage. With that said, why not drill more verticals whose cost per barrel of $61 per BOE (see footnotes above) is much less than the $243 per BOE it’s paying for horizontals?

PetroRiver Oil (PTRC) is a micro-cap E&P whose acreage, located along the Nemaha Ridge in Southeast Kansas, is in the same geological area as Austex. The company’s team is made up of some of the key engineers and executives who designed Austex’ vertical program. Due to Austex’ success, it’s likely they’ll take a similar approach. Petro is definitely a company to keep an eye on in the Lime as they’re well positioned in a play with a lot of upside.

The Mississippian has gotten some bad press from companies like SandRidge and Range, as both have pumped the markets on the play’s economics and probably taken the wrong approach to development. While it’s not prudent to make decisions based on a few solid well results, I believe the geological characteristics of the Lime make vertical wells (at least initially), the best method to develop the play.