Age demographics do not care about the price of oil. Whether oil is at $100/barrel or at $30/barrel, babies get born, people age and pass away, and when they do, their assets get passed on to their families, dear friends, favorite charities, or alma maters.This could be the great, untold story of the Great Crew Change – the massive transfer of mineral wealth that is happening each and every day.
However, this article is not about that.
Instead, we’re going to look at how the next generation of mineral wealth might be identified.
The Current Unconventional Wisdom
In the midst of the economic pain that all sectors of the fossil fuel are enduring, virtually all discussion has centered on how a price recovery will be shaped by the massive portfolio of unconventional wells that we have drilled.
But, how will DUCS (drilled, uncompleted wells) moderate price appreciation as independent operators gauge their margins and IRRs and model when and where to complete and bring production into a precariously balanced market?
Who has the available cash, or the access to financing, to engage in targeted acquisitions of seemingly attractive unconventional assets? Given the volatility in prices, how will they be allowed to book their assets, especially if much of their acquired acreage is in that never-never land between proved producing and proved undeveloped. How will banks that continue to finance energy clients set their loan covenants with their borrowers? How has the pace of innovation to best practices been slowed by the downturn in activity—since each well is an experiment that delivers and amplifies the knowledge base of the industry?
And, most importantly, how do you model the price of oil—or at least constrain your price risks—given the huge numbers of independent variables that affect both demand and supply? If it’s that difficult to model, how do corporate risk officers control for the financial risk to their enterprises?
The Conventional Option
Maybe you don’t. Maybe you target your acquisitions toward conventional assets by focusing on economic drivers that require less financial engineering and which are more predictable.
The universe of players is almost infinite in its complexity, ranging from financially responsible large companies to salvage buyers who may be looking for pre-plugging behind pipe potential.
Therefore, the number of economic models will be dizzyingly varied, but some of the analysis processes used to identify opportunity can be constrained.
Let’s set the following problem in terms of a very modest acquisition budget: I want to identify all producing leases in Texas that are producing between 20-50 barrels a day and which will have operating expenses below $10,000/month. I choose these constraints because operators with these metrics may be more likely to sell their producing asset base.
Since cost information is notoriously hard to compile, we’re going to use the number of active wells as a proxy for operating costs, and so we have limited the query to currently producing leases with 1-4 active wells that are producing 20-50 BOPD.
Here’s my map, courtesy of DI Desktop allocation option invoked)—
In order to get a sense of where the best opportunities are, we’ve put them in a scatter plot and plotted, by Texas county with the EURS for each operated property.
The scatterplot quickly illuminates the population of operated properties for each EUR level ( EUR=300,000BBL highlighted in turquoise), and which counties have rich spectra of EUR values (example in vertical pink box).
If a prospector is interested in KS operated properties making between 100-500 BOPD with 5 or less wells and with TD’s less than 6000’, here’s the opportunity space:
And to constrain my apparent opportunity set, I can see how thoroughly the areas that I’m interest in have been leased.
These are but two examples of the kind of opportunity identification that acquisition minded operators or private equity interests could consider.
There are many advantages to acquiring maturing conventional properties.
- The cost structure is known
- Any development drilling is cheap relative to horizontal drilling and completion operations
- The reserves are proved producing and therefore are immediately bookable
- They can be more nimbly managed in a time of price volatility
A final point. The decline profile of unconventional wells is severe.
This set of type curves by year in the Bakken shows the behavior
Compare the Bakken decline behavior above to the performance of this well in the Utah hinge line play:
Well-chosen conventional production has a longer producing lifetime, and will deplete the reserve base more slowly than unconventional properties will. And although it’s not as exciting on the front end of $100 oil, it’s way less painful than producing 50% of your reserve base when prices are massively depressed.
What do you think? Leave a comment below.
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