The relentless escalation in well productivity is proving as impactful to exploration and production (E&P) operators as are commodity prices, say analysts with Raymond James & Associates Inc.
The production growth largely has been credited to the discovery of new resources and the elevated rig count, noted analysts John Freeman, J. Marshall Adkins and Praveen Nara. But that's not necessarily the headline.
"The bigger driver is the fact that, on a per-well basis, production rates have continued to move higher in almost every formation where horizontal drilling is being applied," said the trio. "This more important part of the story is clearly evident" based on recent initial production (IP) rate trends for several horizontal plays, including the Bakken, Eagle Ford and Marcellus shales.
Most attention each day is given to commodity prices and now they drive production and E&P value because the price to sell oil and gas has a big impact on profitability. "But we think well productivity is just as impactful of a storyline that gets a fraction of the attention," said the Raymond James team.
"A $5.00 decline in oil prices can roughly be offset by a 5% improvement in well productivity. But while oil prices have been relatively range-bound for the past five years, well productivity has been moving relentlessly higher. Accordingly, we believe oil and gas cash flows will move meaningfully higher as production growth and efficiency gains offset structurally bearish commodity price fundamentals."
The trio analyzed well productivity trends in the Permian and Williston basins, two major resource bases in different stages of development. Both basins are seeing substantial horizontal drilling, but the Williston is much further along in the process. Both plays are showing improvements in well productivities, but the Bakken Shale growth rate is beginning to slow while the Permian is beginning to boom.
The Permian today is the "cool kid in the clubhouse," and for good reason, said analysts. Since the beginning of 2007, IP rates over six months per horizontal well drilled have risen by 2.5 times for an annual compound annual growth rate (CAGR) of 15%, according to analysts. The basin is showing no signs of slowing either.
"Given the stacked formation nature of the basin, one could argue there is a higher ceiling (or more room to run) on technological advances here than in the Williston," where production per well growth has slowed since 2010.
Horizontal wells in the Williston Basin primarily target the Bakken and Three Forks formations and horizontal drilling has more than doubled in productivity since the start of 2007.
"This is an impressive achievement, but it is important to note the advance hasn't been linear," analysts noted. "From 2007 until 2010, productivity jumps came in nearly every quarter, with production per well increasing at an annual CAGR of nearly 30%. Since the start of 2010, growth has been slower with initial 6-month production per well increasing at a much slower 5% per year pace."
However, overall productivity advances haven't slowed much, the analysts argued, because in the ramp-up from 2007 to 2010, improvements in well productivity primarily were driven by longer laterals and an increased number of fracture (frack) stages in the highly productive core areas.
In those earlier years, frack crews were in short supply and in high demand "and it was likely cost-prohibitive to hire a crew to perform 30 frack stages per well." As more crews arrived, they also remained for longer periods.
"As a result, we believe from 2007 to 2010 the play saw huge jumps in lateral lengths and frack stages per well, driving the massive 30% annual productivity per well gains."
In the past four years, there have been a few changes in the Williston as well, with the focus today on optimizing fields, not only each well. Also, the Three Forks formation is less productive than the Bakken, creating a drag on overall Williston Basin output.
As Raymond James analysts have noted before, the "E" in E&P is disappearing.
Today's operators are "manufacturing companies," where production has become more important than exploration success, said Freeman and his colleagues.
"There simply is not as much exploration risk in today's E&P world since dry holes are, for the most part, a 20th Century problem. Today, E&P companies are focusing on extracting the largest amount of oil or gas for the least amount of cost. While it may sound obvious, this mindset has not always been the case for oil and gas producers. It is today.”