Insulation From Price Inflation: 2 Operating Strategies Realize Same Positive Outcome

Energy Analytics
byEnverus

Cost inflation impacts everyone. But for operating companies that aren’t strangers to volatility and adversity, there are opportunities for strong performance despite rising prices.

In the Nov. 15 Enverus Intelligence®| Research Morning Energy article, Andrew Gillick explores the factors impacting company valuations. Cost inflation and rising rates are two factors affecting investing decisions, but inflation doesn’t have as big an impact on FCF/EV yields, which remain above 10% despite 40% cost inflation.

There’s much more to unpack behind this statement that can be found in this new report, Finding the Valuation Floor: Cost-Inflation and Discount-Rate Scenarios, available to current subscribers of Enverus Intelligence®| Research.

How are different companies insulating their performance against rising inflation?

The bullet points below, sourced from two articles written by Erin Faulkner, senior editor on the Enverus Publications team, highlight how Gulfport Energy and Hess are tackling this challenge head on with unique strategies that are working to insulate their businesses against this industry-wide problem.

Subscribers to Enverus Intelligence Publications can access the full articles via the links provided below.   

Click here to read the Nov. 10 article, “Gulfport boosts EURs, lowers development costs in Utica.”

  • Gulfport Energy’s Utica D&C program has focused this year on utilizing wider spacing, longer laterals and right-sized completions for each pad. The results have been increased EURs and lower developments costs. Despite 25% inflation on D&C costs in 2022, Gulfport’s Utica development costs have averaged $0.62/Mcfe, which is only $0.02 more than in 2021 and down $0.20 cents compared to 2020.
  • Gulfport has been running a one-rig program in the Utica this year and plans to add a top-hole rig in Q4 that will run for six months to allow a continuous completion schedule. The company believes this level of activity should allow a continuous eight-month frac program in the Utica, eliminating the risk of releasing crews in today’s tight service market and providing the opportunity for increased efficiencies and cost savings.

Click here to read the Oct. 27 article, “Hess cutting inflation impacts in half vs. industry average.”

  • Despite double-digit inflation, Hess has been able to maintain its 2022 Bakken well cost guidance of $6.3 million. While the industry has seen a 15-20% YOY increase in prices, Hess was able to reduce the impact to just 8.5% through lean manufacturing, strategic contracting and technology, COO Gregory Hill said on an Oct. 26 earnings call.
  • In the Bakken, the company drilled 20 wells, brought online 22 in Q3, will drill another 30 and turn in line 25 in Q4. In addition to a new-well D&C program, Hess is also refracturing older wells. “In some cases, the wells, the IP rates that we’re seeing are as good as some of the new wells,” Hill said on the Q3 call. “And that’s not surprising because these were kind of vintage 001 completions. We have several hundred wells that we could refrac, and we will fit them in our program as we go forward. One of the advantages of the refrac program is it allows you more continuity with the frac crew. So, we’ve been sort of dovetailing some refracs into our program just to maintain continuity of a second frac crew.”

Here are a few key takeaways to explore to combat the impact of inflation on your business:

  • Optimized well designs can lower development costs.
  • Continue frac schedules to retain frac crews in a tight labor market. This creates efficiencies and additional cost savings. You could also consider refrac programs, like Hess, to maintain continuity with frac crews.
  • Explore technology options that can increase efficiency of operations.
  • Analyze pricing with your vendors to find opportunities to lock in long-term price contracts.

Not a subscriber to Enverus Intelligence®| Research? Call 1-800-282-4245 or email [email protected] to subscribe.

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