Whiting (NYSE:WLL) had what I consider to be a breakout quarter as it crushed analyst estimates on both the top and bottom lines. It was reminiscent of start of EOG Resources' (NYSE:EOG) run that began half way through 2012. Whiting's beat was driven by its new well design. It significantly increases production at roughly the same well costs. Although costs do not increase, proppant usage does. By pulverizing the source rock near the well bore, it opens up a much larger void which needs to be filled with large amounts of proppant. Not only does this benefit operators like Whiting, but also frac sand producers like U.S. Silica (NYSE:SLCA), Hi-Crush (NYSE:HCLP) and Emerge Energy (NYSE:EMES). EOG Resources has been using this design the longest, and it uses approximately 1000 pounds of sand per lateral foot. This is from 2.5 to 5 times the proppant of the average Bakken well. These sharp increases in demand for frac sand per well will drive frac sand prices higher, as I reported in a previous article.
Whiting's beat was significant. It reported Q3 revenues of $830.99 million vs. analyst estimates of $684.39 million. Revenues increased 56.6% year over year. On the bottom line, it beat by 21 cents, reporting $1.28/share. Its quarterly net income was $1.71/share compared to $.70/share in the same quarter a year ago. Whiting had a non-cash $15.7 million loss on crude oil and natural gas derivatives and other one-time items. The most important variable for Whiting in Q3 was production growth. It grew 12% over the same quarter a year ago to 92750 Boe/d. It produced 8.53M Boe in Q3. This is exceptional as Whiting sold its Postle Field assets which produced 7560 Boe/d in Q2. Whiting estimates Q4 production of 8.8M to 9.2M Boe. Whiting's FY 2013 estimates have production of 33.9 M to 34.2M Boe. Whiting also announced the sale of 42 thousand acres at Big Tex Prospect for $150 million.
In my opinion, Whiting is making the right moves. I began using a new well design last quarter. I reported on this in July and we should continue to see production improvements per foot. It has divested acreage in both Big Tex and Postle enhanced oil recovery project. This allowed it to add acreage in the Williston Basin that is prospective the lower Bakken silt. This acreage added production of 2420 Boe/d. It also added 32400 net acres in the Niobrara. Wells here have an average cost of $5.5 million and produce EURs above 400 MBoe. This is important, as I have been bullish this area. It is a stacked play with at least 3 good intervals, and in some areas 4. The Niobrara is prospective here, with intervals at A, B, and C. These are all consistent and should produce like returns. It is possible the Codell is also economic, but I don't have enough data to support this assumption.
Those who read my articles know this area has value. We have seen Synergy (NYSEMKT:SYRG), Bonanza Creek (NYSE:BCEI), and PDC Energy (NASDAQ:PDCE) are all outperformers and stocks I have been bullish. The early success of this sand heavy well design is bullish these operators, as all three could benefit by adopting it. Whiting is focusing on two very exciting core plays. It also accumulated a half million net acres in 3 new U.S. oil resource plays at an average cost of $228/acre.
The most important reason for Whiting's great quarter was its new well style. This contributed an increase in production, adding revenues and net income. This design is based on EOG's well design. There are some differences, and keep in mind EOG is further ahead. I believe Whiting has short term upside as it refines this process. EOG has a better overall design. What needs to be focused on is cost. EOG Resources changed its completion design and increased its proppant usage to 1000+ proppant per lateral foot. Keep in mind, these new completions have little to do just dumping the sand down hole. There must be very good source rock stimulation to open a large enough void to allow for this much sand. Whiting has seen a 50% to 75% improvement in results over its old completion design in the short term. Below I have provided Whiting's well design in Sanish Field for its 2013 completions.
|Well||Lateral Ft.||Stages||Water Bbls.||Total Proppant Lbs.||Proppant/Foot|
The above table is a list of Whiting's Sanish Field well design for wells completed this year. It is important to note that none of the above wells used ceramic proppant. Pressures are lower in the Sanish Field, so ceramic proppant is not needed. EOG Resources has been able to use just 20/40 frac sand, in Antelope Field of northeast McKenzie County. This provides further support of frac sand in deeper areas of the basin as well. When the data is broken down in the table above, we see Whiting used a wide variance of proppant pounds/foot. The lowest concentration was just 122.5 pounds/foot, while the highest was 303.5 pounds per foot. When comparing Whiting's proppant amounts, it is low when compared to other operators. The last well in the above table used Whiting's new well design and used 609.4 pounds of sand per foot. This well (in bold) is the last on the above table. It is just as important to note the big change in water volumes as Whiting used 10 barrels of water per foot. The stages were tightened. This better design garners more resource and will change the way we believe a horizontal well depletes.
When we compare the wells completed this year to those from 2008 to 2010, we see even lower volumes of proppant. These wells are provided in the table below.
|Well||Lateral Ft.||Water Bbls.||Proppant Lbs.||Proppant/Foot|
This isn't all of Whiting's Sanish Field results in 2008 to 2010, but gives a good idea of its well design. I excluded wells that did not list proppant and/or water amounts in its well file. The average proppant per foot in its early Sanish Field wells is quite low. This is to be expected as operators were trying to get a grasp of both well design and geology. There were many mistakes made, but that is how companies like Whiting figure out where to make improvements. As a general rule, Whiting has kept its proppant per foot in a range below 200 pounds per foot. So far in 2013, Whiting's average range was in the low to mid two hundred pound level.
Outside of Sanish Field, Whiting is still using some ceramic proppant. Ceramics are used mostly in McKenzie County, where the play is at its deepest. It also uses some all sand fracs in McKenzie. It is doing the same in Stark County. Whiting seems to be experimenting with amounts and types of proppant. It continues this to figure out how to adjust proppant amounts and types needed.
Looking forward to its well design, Whiting is planning to use between 4 and 5 million pounds of sand per well. This seems a little light to me, as EOG is using 9 to 10 million pounds per well on long laterals. I am sure it will increase proppant amounts as improves its stimulation of the interval. The key to EOG's and Whiting's success are tighter stages and perforation clusters per stage. The combination of the two pulverizes the source rock near the well bore. This is a much more productive completion design, and it is roughly the same cost as the old design. Focus should not be placed on the now but improvements that are almost surely to be seen over the next year or two. Whiting has one slickwater well, but has several coming on line down the road. This could also bolster EURs out in Missouri Breaks.
There are several other operators testing this approach in the Bakken. The only issue is limited data. EOG has done enough work to prove the approach is successful, but it is the only operator with enough production data. Whiting is very new to this completion style and should see a quick improvement as it gets more comfortable. In the Sanish Field, it increased significantly the amount of proppant per foot. This was over 600 pounds per foot. Although I do not like using 24 hour IP rates, Whiting has seen a marked improvement with this method. I plan to provide a better comparison after more wells come off confidential status. The table below provides these IP rate improvements.
|Eide 41-13HR||Hidden Bench||Uncemented||2715|
|Eide 41-13-2H||Hidden Bench||Cemented||3795|
|Kjelstrup 44-24 TFH||Lewis & Clark||Uncemented||884|
|Kjelstrup Fed 11-19-1PH||Lewis & Clark||Cemented||1348|
|Mullin 21-24-1H||Missouri Breaks||Uncemented||481|
|Weber 24-30-1H||Missouri Breaks||Cemented||1164|
|Sundheim Fed 24-35-1H||Missouri Breaks||Uncemented||563|
|Barter 21-3H||Missouri Breaks||Uncemented||476|
|Sundheim 31-2-1H||Missouri Breaks||Cemented||1093|
The above results provide a series of wells throughout Whiting's acreage. Although Whiting does not provide choke information, I would assume all wells were set up on the same size as it could skew results significantly. I will be checking on this when the info is no longer on confidential status. I would guess these wells will be on a 40/64 or 48/64, as this has been the standard sizes Whiting has used for the past couple of years. These wells are in close proximity with each prospect. This is why it is a good comparison. The table below provides the increase in IP rate broken down by prospect.
|Prospect||24 Hour IP Rate Improvement Of Cemented Liner|
|Lewis & Clark||34.4%|
|Missouri Breaks 1||58.7%|
|Missouri Breaks 2|
The above data is based off of 24 hour IP rates, and is not a good indicator of long term production. We are real early, but Whiting seems confident this design will be significantly better than wells with uncemented liners. If it was unsure of its new results, it wouldn't put together a presentation surrounding this specific completion style. Like EOG's results, these wells should see a flattening of the depletion curve which should lead to some very good 90 day IP rates. Only time will tell for sure.
In summary, Whiting's well design is a game changer. Looking at older EOG wells, we know this design adds about 30% to 50% to EURs. In Whiting's case we could see an even better return. The comparisons I have made in EOG's wells had a much better initial well design. Whiting's is a much different comparison as its old wells underperformed EOG's. This production growth comes at roughly the same costs. Whiting's Sanish Field and Pronghorn prospect are not as deep as the center of the basin. Because of this, it uses a straight sand frac. This will increase its sand usage significantly. Whiting has alluded it may use some ceramics and ceramic coated sand in the deeper areas. Whiting has also had success in the Niobrara, with this technique. These wells can use up to 8 million pounds of sand. Although Whiting uses less sand per foot than EOG, we could see this increase as Whiting gets better at source rock stimulation. It is rumored that there are a handful of other Bakken operators using cemented liners with multiple perforation clusters per stage. This should help drive Bakken revenues, and could improve top and bottom line numbers. Longer term, it could substantially increase demand for frac sand. This is why there has been heavy buying of U.S. Silica, Hi-Crush, and Emerge Energy. Even with the run up, we are still in the early innings of this change in well design and increased demand for frac sand.
Disclosure: I am long BCEI, PDCE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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