Jim Volker - Chairman and CEO
Michael McAllister - Mitsubishi UFJ Securities
Whiting Petroleum Corp. (WLL) IPAA Oil and Gas Investment Symposium Conference Transcript September 30, 2013 3:50 PM ET
Michael McAllister - Mitsubishi UFJ Securities
Good afternoon again. My name is Michael McAllister. I am the oil and gas strategist with Mitsubishi UFJ Securities and the sponsor of today’s lunch. Mitsubishi Securities is the securities arm of the MFG Group which is a subsidiary of Bank of Tokyo and Union Bank or Union Bank and Bank of Tokyo subsidiaries of the MUFG. It’s now my pleasure to introduce today’s speaker, Mr. Jim Volker, Chairman and CEO of Whiting Petroleum and South Texas’ favorite quail hunter.
Thank you, Michael. Thank you so much. It’s a pleasure to be in San Francisco, thanks so much to IPAA and OGIS. It’s great to see a lot of familiar and friendly faces here. I’ll get right into the slide presentation if you don’t mind and then I’ll then I will start open it up for questions at the end.
So this first slide up here, really tells the story of the brand new, I think second oil and gas oil play that Whiting is involved in. It’s basically going horizontal in Niobrara B in Weld County, Colorado, a particular portion of Weld County, Colorado which is know as the Colorado Mineral belt, where the Niobrara B is in the expansion phase for oil and where Whiting has put together about 100,000 net acres.
So, just to talk briefly and remind you please take a look at our forward-looking statement disclosure here. There is a number of things that Whiting is bound. We do have put ourselves as a company on the move and these five items pretty well, I think, summarize what we have been doing over the last few months.
Recently, of course, we just did a $260 million acquisition of more acreage in our core Bakken area. We added about 17,000 net areas and about -- 17,000 net acres and about 2,400 BOEs a day bringing Whiting’s production even closer to that sort of magic 100,000 net BOEs a day level.
We did that right after we sold our great asset to a friends of Breitburn who paid us about $860 million for our Postle field which has produced a little over 7,000 barrels a day and I like -- I love that field, but Postle is a better asset for them. It’s on a general decline and we had a lot of drilling to do in the Bakken and the Niobrara. So that field which we bought for $240 million in 2005, we sold for $860 million this year.
So we are very pleased about that that limit up our borrowing base. We paid off a lot of debt. We therefore sold just a little over 11% of our total reserves, but we paid off about 50% of our entire bank debt with that -- with the proceeds from that sale and limited up so that our borrowing base would be available to us, should we need it.
With that money we are accelerating the development of our Redtail Prospect and as I just mentioned, I do think it is another world class oil play, another world class oil resource play and as I’ll show you here shortly, we think we have over 3,000 drilling locations there for the Niobrara B.
We are embarking on that currently and we are ramping up with another rig this month. We will be at three by the end of this month. I predict by the middle of next year, we certainly be at five rigs. By the beginning of 2016 we’ll probably be at eight. At the beginning of the 2016, we’ll probably be at 11 and basically we have tend to drill it all up in a period of about seven years so we actually intend in 2017 to add nine more rigs for our current plan.
So we are going to bring all that present value forward and added to our net asset value per share. That’s what Whiting is all about and we have been doing it in resource oil plays.
Speaking of additional resource oil plays, as -- what I would say optionality of Whiting and some additional upside, bringing the products two years we have also acquired about a 0.5 million net acres in three additional horizontal resource oil plays in new basins for us, new basins that is outside of the Bakken and outside of the Denver Basin where our Redtail Niobrara B play is located.
So we have three others cooking on the back burner. And in additional, of course, I have mentioned that about our reserves, our reserves are actually up about 17% year-over-year as of the middle of the year. Basically that means we replace the roughly 11% to 12% that we sold, when we sold Postle and then we have added about another 5%, so in term of about 17% as of the middle of the year.
Let’s talk about why Whiting is involved in oil plays? Why we have concentrated on them since we went public in 2003, this is a good graph that basically shows why. We have truly managed live through at least three soft periods in the price for natural gas after we bought the third one in early May. We are in this business I have decided we have to concentrate on oil. It doesn’t always move like this.
So in different story friends who are doing a great job frankly handling what was the energy issue here in the United States and had brought a lot of great natural gas today for our use in the United States. I had talked to them, oil has been a little harder to find and consequently we have concentrated on these horizontal resource plays for oil.
World oil consumption today that’s about 90,000 barrels a day, world-wide production, our ex-U.S. and Canada, as you can see about 73,500 barrels a day. So as we talk about U.S. oil production, it has been growing as of the end of the year about 9 million barrels a day and continuing to grow.
The Bakken is a big portion of that. I do expect here within the next year or so it will approach 950,000 BOEs a day. And Whiting is a big portion of that. We are currently running 18 rigs in the Bakken.
So this is really my opinion, this growth in the production of domestic energy, especially oil is behind these two graphs. The U.S. is exporting crude oil and mostly in the form of refined products predominantly diesel.
We are over 3 million barrels a day as of the end of 2012 and that’s driving down that balance of payment issue that we had and consequently it’s good for jobs and it’s good for the dollar. As our trade deficit has decline by a couple $100 billion a year since going back to 2005 and from the 2008, 2009 recession.
So looking specifically at Whiting, in the second quarter production was up 16% year-over-year and growing as you can see here almost 5% quarter-over-quarter. Our proved reserves as the beginning of the year were about 378 million BOEs, 80% of which was oil and in terms of where that production was coming from, 75% of it was coming out of the Rocky Mountain region, which we think is where a large portion of the undiscovered oil in the United States will be found.
So about 75% of our production was coming out of the Rocky Mountain region, about 13% of the Permian and about 12% out of the Mid-Continent, so in terms of our reserves, the Rockies are about 50%, 33% from the Permian and about 13% from the Mid-Continent.
In the second column from the right there you can see that our total PV10 value as of January 1 of this year is about $10 billion 3P. As a result of the events that I just mentioned, this $860 million sale of Postle from which we netted about $836 million and which will continue to operate for our friends at Breitburn until the end of this month.
Whiting has been let say involved in this transforming transaction that allows us to deploy more capital to our development areas in the Northern Rockies, that’s the Bakken, the Central Rockies, since that’s the Redtail Niobrara play and the Permian Basin where we have a project we call Big Tex which is a horizontal, Wolfcamp play is working well for us and for others.
So, our bank credit agreement was about $2.15 billion after the sale. However, as you see there in footnote number one, we subsequently voluntarily reduced that down. So we didn’t have to pay for that standby capital to about $1.2 billion. Why? Because we just sold $2.3 billion worth of bonds and got great interest rate of about 5.3%.
What are we going to do with that $2.3 billion? Well, number one, we paid off a $1 billion worth of bank debt. Number two, we used about $0.5 billion to do two things, number one, basically this $250 million acquisition and also we got about $250 million worth of bonds that come due in February and then pay about $300 million worth of our spend of CapEx over discretionary cash flow in 2013 and also give us the debt necessary to make our way of oil production growth wise even faster in 2014 as we develop our Niobrara B prospect as I mentioned known as Redtail.
So 2013 CapEx budget, which we increased about $300 million in Q2 is total $2.5 billion as you can see the Northern Rockies get the bulk of that that’s the Niobrara at 52%, EOR that’s our -- EOR project in Midland, Texas about 8%.
The Central Rockies is ramping up, as you can see its now up to about $166 million and growing and we would expect that it will be in the range of $400 million to $500 million as we add those rigs that I mentioned, although based upon the fact that those wells there that we are drilling in the Niobrara B payout for us in less than a year, basically in about $5 million well cost and they are paying out for us little less than a year. I don’t think our net negative cash flow will ever rise much more, too much more than about $250 million and it will go positive for us pretty quick.
So when we looking at our inventory here, this is what its look like as of January 1 of this year and as you can see in the left hand column it totals almost 10,000 drilling locations, I have highlighted that then we thought it was about 2,400 drilling locations in the Niobrara B.
Today, of course, the Bakken is the place where we have the most rigs and that’s because it is an oil rich zone. This is a great cross section that shows the Bakken hydrocarbon system not only the Middle Bakken, the A, B, C and D zones where we basically put our well bores predominantly in the B. But we also highlight in this slide, the B zone and the Three Forks.
The Middle Bakken alone calling your attention to that 30 million barrel number is a very rich zone and it includes the D zone which has the highest amount of oil in place per 1,280 acre drilling spacing unit.
So, keep that 30 million number in place in mind, as I am going to compared that for you here shortly for the Niobrara B and you are going to be surprise I think is what you see. So since where we all in Bakken plays right now is that we think with 30 million barrels of oil in place per drilling spacing unit and drilling seven wells per drilling spacing unit we are going to drive that recovery faster as we have done to 15%.
This is our well plan by prospects. We have these six prospects areas across the Williston Basin. As you can see the number of wells per drilling spacing unit there is goes from low of six wells to high of 15 wells depending upon which zone we are in and which areas essentially productive for us.
But basically it’s the Middle Bakken, the Three Forks, the 1st Bench, 2nd Bench and then an area that we call the Pronghorn Sand that was working well for us on our Pronghorn prospect.
So Whiting now has, if you look at the far right hand column here, approximately 714,000 net acres in the Bakken, one of the largest net acreage owners. We basically tested the extremities of our acreage position from the far west to the far east and we believe it all is productive and has over 10,000 drilling locations in total when added to all of our other prospect areas.
The Southern Williston Basin has really taken off for us and for others, so I highlighted for you here some of our most recent results, which are basically the result of changing our completion techniques. So from -- away from sliding sleeves and doing some cemented liner completions and that’s responsible for raising our IPs in -- along the western edge of our acreage position from about 800 barrels a day to about 1200 BOEs a day.
The Western Williston Basin that’s apart from the Southern Williston basin that I just showed is also benefiting from new completion techniques. It’s currently doing little better than that typically between 1200 and 1400 BOEs a day even in the far western portion of our acreage position, where we’ve been bringing in wells, in some cases as high as over 1400 BOEs a day. But in total averaging about 1200 BOEs a days and that’s up from about 800 BOEs a day prior to the time that we went to the cemented liners in bigger frac jobs.
And by that I mean, we’re getting the sand volumes up there to between 5 million pounds and 6 million pounds per job. And back at Sanish which is where we started in this play, Sanish continues to be really a major sweet spot in the Bakken. And here as you can see, we are doing down spacing so that we’re adding about three wells per drilling spacing unit. And that is as a result of the way in which we’re completing them with more sand even on the down spacing and this has been announced not only by Whiting but also by EOG who is doing it very successfully over partial, continues to bring wells in typically between 2000 and 2500 BOEs a day in that area.
What I would say that we have here is called our prospects that drill for Red River in Sheridan, Roosevelt and Golden Valley counties. So this is a -- these Red River plays for us essentially are in that area of the white lettering is so called The Richland Roosevelt Trend and the Big Island is one of the places where we own about 126,000 net acres. Starbuck is another. Missouri Breaks is another.
The great thing about Missouri here is these are vertical wells, capable of getting us to about 300,000 BOEs a day for a well cost of only about $3 million. The other thing is that we run some seismic here and we do believe that the certain areas are going to have the potential to go horizontal -- and change the nature of this play to a bigger resource play. So we are very happy that we have this huge acreage position here in the Western Williston Basin.
The economics of the Bakken are typically today is roughly $100 oil price, about 4 to 1 on your money, great IRRs of about 189%, payouts in eight to nine months. And they’re typically adding per $7.5 million well cost. They’re adding over $13 million of PV 10 value at Whiting.
People has always been concerned about the takeaway capacity of the Bakken and we have the slide in here which shows that with the rail which is the blue color here on horizontal lines that the rail capacity is going to get up over 2 million barrels a day.
The red and the black lines basically are projections where the production is going from basically about 1.5 billion barrels a day to perhaps 2 million barrels a day as estimated by the North Dakota Pipeline Association and that seems to be right on. Unfortunately, right now there is plenty of takeaway capacity such that the differential is up there. I think they’re going to average around $5 off of NYMEX.
So Whiting is creating some other values we built in our midstream, we built the plant right at the center of the Sanish field. The plant costs us in total about $130 million and its cash flowing to us at about $40 million a year net to our half interest.
So that’s something that we’ve talked about from time to time monetizing and are still sort of reviewing the many options that come in the door from people who’d be interested in being a partner with us in some sort of -- I’m going to say facilities fund where they might own piece of it for eight to 10-year period and then ownership they deserve back to Whiting.
We’re doing the same thing at our new play out near Belfield, near the town of Belfield and we whereas our friend Kaiser- Francis Oil is 50% partner with us. They’re in the Sanish field, the Fidelity, a subsidiary of MDU, is 50% partner with us. So they put their production into this plant along with ours and it also has excellent economics.
Let’s talk about Redtail. This is the exciting news at Whiting. Again I think it is the second world class oil play that Whiting is involved in right now. The red lines depict the Colorado mineral belt. One thing I’d like to point out here is that we have excellent geologic information and engineering information from the four corners of our acreage position here because there are lots of wells drilled in the 50s and 60s that went through the Niobrara all the way down to the D in the [J] sandstone.
So all those green dots that you see there and if you look closely the little grey oil symbols underneath are old wells that we drilled and we have the logs and in some cases core. We also took core on our own in these areas.
And so we have high confidence that we’ll be able to repeat the type of drilling highlights that you see in the lower right-hand corner on this slide between 700 and a 1,000 barrels a day IPs and a drilling plant here that will take us well through a seven to 10-year period. We’ve done it here in basically four phases, four year essentially as we run our seismic.
What does it mean? Well, it means that buy phase and round numbers, 900 wells, 500 wells, 500 wells and 1,500 wells. So in total only 3,000 wells we simply can drill here in our Redtail prospect. It’s very active out there.
Right now, I was out there twice last week. And I can tell you that we and Noble are picking it up and laying it down. They have two huge Bakken style rigs drilling just down the rig from us. I’m going to go back a few slides here now so you can see something.
So if you -- what's -- we can do that right. Let’s go right there. So the pink acreage is acreage that we own. And I’m going to say in concert with where we’re partners with Noble, some of you -- some people asked me where is Nobel’s pony area that’s the pink area there.
So the wells at Whiting is drilled. Basically, we’re in the heart of the pony area, I think. And then as we go out from there north, south, east and west, we have good geologic control that tells us that the Niobrara B and the Niobrara A are there all across our -- as you can see by the third heading on the slide 120,000 net acre -- acreage position.
So we think that this area really is the golden triangle. What do I mean by that? Well, that’s our acreage position and as you can see on the north, only about 17 miles north of the center of our acreage position where we happen to be building a natural gas plant right now to handle all the gas that will also produce there is a trailblazer line.
After these, diverse is a line that is being basically run all the way. Just currently, it’s being converted into an oil line that’s running. It’ll run all the way to Cushing and to other markets and then there is an NGL line off of the west of us.
So we’re located right in the middle of some great facilities that will gives us good takeaway capacity. And we’re in the process of building this Redtail natural gas plant out there that we believe will have an 8-K plate capacity of about 45 million cubic feet of gas a day and be capable of actually about 60 million cubic feet of gas a day.
And we believe that will produce above 1 billion of oil for every MCF of gas a day. When these wells come in in, the do about half an MCF a day per barrel and after a year or so about 1 MCF per barrel. So while we expect that we’ll have some sizable oil production to sell out here and being roughly 80% to 90% oil production. So we’re making the investment necessary to capture all those gas streams and those little flaring out there is possible.
Look at the black portion of this log. It shows you the Niobrara A, B and C, and how oil rich it is. We quantify that for you in the far right-hand column here. And this is why I ask you to remember that 30 million barrels from the Bakken for drilling spacing unit. It’s 59 million barrels for drilling spacing units here in the Niobrara.
So twice as rich effectively proved drilling spacing units. These are 960 spacing units Bakkens 1280 and we expect to drill about 16 wells. And we’re drilling basically two 8-well pads for drilling spacing unit moving on quite nicely. And each rig out there, we’ll be able to about 30 wells per year.
So even when we get to our five rigs, we’ll be drilling about 150 wells a year. And we expect recoveries of over 500,000 BOEs per well, why? Because as you can see here, our original 400,000-BOE type curves being seated -- being exceeded by the wells that we’ve been drilling out there over the last couple of months so last seven wells are really outperforming that 400,000-BOE type curve.
Moving on to Big Tex, this is a prospect that we have in West Texas. There has been a project that’s allowed us to put together almost 70,000 net acreage drilling cost down there in the $8 million to $9 million range. We think we’re coming in with about 400,000 BOEs.
Lot of other activities. So I’m going to say north, south, west, and even east of west with other operators now bringing in wells that are having IPs in the range of 1,000 BOEs a day. We’re entertaining some offers for joint ventures or even a partial sale here, why? Because frankly we’re having lot on our plate in the Niobrara and the Bakken and so we might take a little cash off the table here. We’ll see the interest continues to be strong from several parties.
Speaking about the EOR project that we still have at Whiting that’s called North Ward Estes. It’s a field, it’s about 3 miles wide and about 15 miles long. And as you look at the second from the right and third from the right columns here, it’s really the story of North Ward Estes.
What we’re doing is moving here above over 100 million barrels in that P2 and P3 into the proved categories. We’re going to do that by continuing to execute on these phases. We have eight of them. We’re in the middle of Phase 4. We’ve taken production from 4,000 barrels a day to about 9,500 barrels a day and for engineering we’re on our way to 20,000 barrels a day between now and 2016, 2017 in that area. So that’s what we love and intend to retain North Ward Estes as we think when we get it up there, it will be worth well over $2 billion.
We’ve been enjoying as other people have the success of bringing on new oil production which essentially has low operating expenses and the excellent oil prices that we’ve been achieving since our current EBITDA margins are about 67% and the highest that they’ve been going all the way back to 2007.
So in summary, ladies and gentlemen, Whiting is a company on the move. We have lot of great things happening. These five items are just some of the things that we’ve done in the last few months.
And I look forward to let’s say coming out with some other great announcements as we move forward and talk a little bit more about everything that we know about our Redtail prospect rig drill prospects and how great it can be for us as we move forward develop that over 3,000 drilling locations.
With that ladies and gentlemen, I will entertain one or two questions before we move on to our breakout session. I’d be happy to answer your question.