Rosehill Resources has published three press releases in the past two months detailing their Q4 southern Delaware Basin acquisitions. We know that they expect to drill upwards of 400 horizontal wells targeting primarily the Wolfcamp A, Wolfcamp B, and Bone Springs formations in Pecos County, TX (https://www.rosehillresources.com/news-media/press-releases/detail/22/rosehill-resources-inc-surpasses-11000-net-acres-with), and that their new neighbors include Jagged Peak Energy, Diamondback Energy, and Parsley Energy. (https://www.rosehillresources.com/news-media/press-releases/detail/15/rosehill-resources-inc-to-significantly-expand-its; Figure 1). In Pecos County, the Drillinginfo Geology team has determined that operators have landed a majority of recent horizontal wells in the Wolfcamp A and B zones. Using the DI Geology team’s Delaware Basin Play Assessment project, we also see the Wolfcamp A and B thicken through this area to the southeast (Figure 2). Rosehill Resources noted that the “contiguous acreage position enables 7,500- to 10,000-foot laterals, which can significantly improve well economics” (https://www.rosehillresources.com/news-media/press-releases/detail/21/rosehill-resources-inc-completes-initial-delaware-basin). Since many operators are increasing both lateral footage and proppant usage in this area, I can use the Drillinginfo web app and DI WellCast to compare the economics of various D&C strategies in this interesting part of the Permian Basin.
The DI Geology team defines primary landing zones (“primary” meaning 60 percent of completed intervals or more landed in a single zone) for horizontal wells by relating deviation surveys to DI Play Assessments structural models. This is particularly useful in areas like the Permian Basin where production reporting is infamously vague. Figure 3 shows that the majority of horizontal wells that can be tied to a primary zone landed in the Wolfcamp A or Wolfcamp B, and that the top producers are all Wolfcamp A or Wolfcamp B wells.
To drill down further, I selected only Wolfcamp A and Wolfcamp B wells and compared perforated interval lengths to both proppant usage and production (Figure 4). We see three populations defined in the data: horizontal wells with perforated interval lengths around 4,500, 7,500, and 10,000 feet. Proppant-per-foot usage is relatively high in this area, so I filtered to wells where 1,500 to 3,000 pounds per foot of proppant were used for the first treatment (frac) job. The goal is to be able to compare Wolfcamp A and Wolfcamp B wells with similar lateral lengths and proppant usage, and to evaluate the potential return on more aggressive versus more conservative drilling and completions strategies.
The Wolfcamp A short laterals (six wells in group) have an average perforated interval of 4,542 feet and average proppant-per-foot usage of 1,984 lbs/ft, compared to Wolfcamp B short laterals (seven in group) whose average perforated interval length is 4,384 feet and average 2,303 lbs/ft of proppant (Figures 5, 6, and 7). The Wolfcamp A medium laterals group (10 in group) averages 7,635 feet for perforated interval length and 2,335 lbs/ft of proppant, while the Wolfcamp B medium laterals group (five in group) averages 7,164 feet for perforated interval length and 2,481 lbs/ft of proppant. Lastly, the Wolfcamp A long laterals group (seven wells in group) has an average perforated interval length of 9,926 feet and averages 2,388 lbs/ft of proppant. There were no long Wolfcamp B laterals to compare to the Wolfcamp A long laterals group.
In order to estimate the IRR for these five populations of horizontal wells, I created a type curve and estimated well costs for each group. Using DI WellCast and my API lists, I fit decline curves to every group using both oil and gas production data, generated EUR estimates (Figure 7), and saved the curves. To estimate differences in drilling and completions costs between groups, I assume a cost of 10 cents per pound for proppant (most of these wells use sand, according to the DI Engineering Explorer completion database) and estimate $700 per lateral foot for drilling and other completion costs. In calculating single-well economics in the DI WellCast tool, I set oil price to $55/bbl and adjusted the drilling and completion costs, otherwise leaving default values, though any of these parameters can be adjusted (Figure 8). The only IRR lower than 25 percent turned out to be the Wolfcamp long laterals group, whose D&C costs were of course quite high. If I drop the D&C cost for the Wolfcamp A long laterals group from $9.3 million to $8 million, then my IRR increases to 25 percent. One of the ~10,000-foot wells in the group was truly outstanding, but in this analysis, there seems to be relatively high risk and uncertainty in executing these more expensive wells. Both Wolfcamp B short and Wolfcamp B medium lateral groups had high IRRs, as did the Wolfcamp A short lateral group.
While there are quite a few standout horizontal wells in the Pecos County acquisition area – particularly wells that landed in the DI Geology-defined Wolfcamp A and Wolfcamp B – there is some notable risk in drilling and completing relatively long laterals with large proppant volumes. Fortunately, the IRR on most of these higher-proppant-per-foot Wolfcamp A and Wolfcamp B wells in Pecos County exceeds 25 percent based on my basic analysis. I’d be interested to see how nearby Reeves County Wolfcamp A and B wells compare, particularly those with long lateral lengths and high proppant usage. Regardless, with a total acquisition cost of less than $120 million and the potential for 400 new horizontal wells (https://www.rosehillresources.com/news-media/press-releases), it sounds promising.