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IHS: Permian Offshoot Making Producers Wait Longer For Payback

Despite cost declines, depressed commodity prices generally don't support drilling in the Northern Midland Basin, a subbasin of the Permian, according to IHS Energy.

Steep decline rates and low prices make for long payback periods that investors generally won't support, according to the recently released IHS Northern Midland Basin Company Play Analysis. Only a handful of areas can recover half of completed well costs in six months or less under a $50/bbl wellhead price, the firm said. And even at a $65/bbl wellhead price, most areas require more than six months to recover half of well costs. After 12 months, nearly one-third of the company sub-plays modeled by IHS recover half of completed well costs.

"Steep production declines for Northern Midland Basin operators greatly increase the economic relevance of maximizing a well's longer-term recovery. This means production performance six to 12 months after coming online, rather than the typical operator emphasis on peak-month production rates that can often be misleading," said Sven Del Pozzo, director, company and transaction research at IHS Energy, and author of the report.

"After six to 12 months, production is not typically high enough to recover the remainder of completed well costs within a time frame that would satisfy investors," he said. "Therefore, today's investment decisions depend more on commodity prices after six to 12 months, optimization of artificial lift, and generation of economies of scale."

The commodity price collapse has largely stifled horizontal development of deeper targets across the play, according to Del Pozzo. The Wolfcamp C and D benches and the Cline Shale have been set aside in favor of the Shallower Wolfcamp benches that initially drew interest to the play. Operators also are testing the Spraberry.

Del Pozzo told NGI's Shale Daily that a pullback in activity is not all bad for development of the play. As operators go slower, they'll learn more, he said. Once investors stop focusing so much on production growth and more on return on investment, it opens the door to more thoughtful play development.

"Once that becomes the mantra, then the companies will just do things more slowly, and when you do things more slowly you do them better," he said. "That's a golden rule. Most people don't even know that because most people covering the energy industry probably haven't been through that many cycles. So basically, when you slow down you get more efficient. You get better returns on capital...rather than just get that well drilled and get it online so we can meet our production target next quarter."

According to IHS, Pioneer Natural Resources, RSP Permian Inc., and Diamondback Energy are the companies most exposed, in terms of acreage, to Midland County, TX, (including its border region with Ector County), where well performance is typically impressive in stacked pay zones.

"This is Pioneer's most prolific county," Del Pozzo said, "together with the border region of northwest Glasscock County, and its valuation is critical to our year-end 2014 appraised net worth. We estimate 60% of Pioneer's acreage value, and one-third of the company's total appraised worth, is located in the Northern Midland Basin."

Pioneer's core acreage is appraised at $32,000 per acre, under a rising price scenario that reaches $85/bbl flat in 2023, after rising in $5/bbl annual increments starting at $50/bbl in 2016, IHS said. "In Upton County, well performance by the various operators was remarkably consistent in the county, but Pioneer's was the best," Del Pozzo said.

Diamondback and RSP Permian are operating near each other and leading their peers as measured by enterprise value-per-acre, IHS said. The two companies' Spraberry play is economic even at current oil prices, superior even to their Wolfcamp development in the same area, Del Pozzo said.

Diamondback has a "monster" Spraberry well in the Gridiron area, with cumulative production of more than 250,000 bbl during a period of about 15 months, and the well also has a stacked Wolfcamp B partner with outstanding results, he said. Several miles away, there is another Gridiron well that is "remarkably prolific."

RSP Permian's Middle Spraberry wells make up a small proportion of its total horizontal well count to date, but the Middle Spraberry peak-month oil production is the company's most prolific, ranging between 20,000 and 25,000 bbl, according to the IHS report.

In recent years, ExxonMobil has increased its Permian exposure via a number of deals, mainly with private entities lacking detailed public disclosure. While the IHS report acknowledges the play is immaterial to Exxon's current enterprise value, based on its production history to date, IHS believes ExxonMobil is also on a learning curve in the play. The company has some highly prospective acreage but requires a price in excess of $65/bbl to be economic, based on the analysis of approximately 20 horizontal wells, some of which flank Diamondback's wells, IHS said.

Recent play entry by QEP Resources and Encana suggests a steep learning curve, and IHS analysts believe these companies' highly prospective acreage would be best developed if it were gradually de-risked to ensure optimal development. In Glasscock County, IHS said Laredo Petroleum trades at a large discount relative to the IHS valuation of the company's assets, while Apache's acreage seems less prospective. Howard County wells are impressive, the IHS report said, but not repeatable for all.

Anecdotal evidence for Howard County operators suggests greater geologic complexity, requiring more science to better unlock its value, but results have been impressive thus far, especially considering it is farther from the center of the basin, IHS said. Strong well performance suggests an active land market in the county. However, an IHS analysis showed that Tall City Operating was shown to have uneconomic wells on average, prior to its recently announced acquisition by a private Chinese entity (see Shale Daily,Oct. 26).

"Encana's southern Howard County wells have impressive peak-month oil production of 30,000 to 35,000 bbl, which is drawing great interest in the Wolfcamp/Spraberry's southern expansion in the county," Del Pozzo said.

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