Seeking Alpha
Oil & gas, commodities, long/short equity, research analyst
Profile| Send Message| ()  

The difficult to control variability of well results in the Mississippian fractured carbonate play remains one of the main challenges for operators. While the issue has been well documented, it is difficult to fully appreciate the degree of this unpredictability without looking at well performance statistics in close detail.

Last week, I wrote about the quarter-to-quarter variability in the average well results reported by SandRidge Energy (SD), the leading operator of the Mississippian. Specifically, I discussed the somewhat surprising slowdown in the company's production growth rate experienced during the third quarter of 2013 - to just 1% sequentially, from 20% sequentially in the prior quarter - despite the large number of new wells turned to sales during Q3.

This article makes an attempt to use production test data for SandRidge's Oklahoma wells to obtain insight into the company's well performance trends and to provide an explanation to the breakdown in the company's seemingly positive operating momentum in the Mississippian observed earlier in the year. The analysis is also used as a prediction tool with regard to SandRidge's current quarter operating results.

A detailed review of production test data for over 270 individual operated wells that were turned in-line by SandRidge during 2013 reveals several important trends in the company's Mississippian operations.

  • First, data confirms that the slowdown in the company's production growth rate in the Mississippian during the third quarter, relative to the two preceding strong quarters, was caused by what appears to be a surprisingly high percentage of underperforming wells.
  • Second, the data for approximately 50 most recent Mississippian wells indicates that the fourth quarter may prove to be much stronger sequentially in terms of the average well results, although it may not be quite as strong as Q2. (The 50 analyzed wells represent more than half of Q4's estimated on-production well count).
  • Third, despite the anticipated improvement in well results, the data vividly demonstrates that SandRidge is yet to find a remedy to the main structural problem associated with its key asset: the lack of predictability of drilling results.

Analysis of Production Test Statistics

Detailed production test data for SandRidge-operated wells in Oklahoma is provided at the end of this article. I strongly encourage readers to take a quick glance at the production data for individual wells, with particular focus on the variability of those results from well to well.

The data is summarized in the table below by quarter. The first two groups of wells, the "Q2 2013 Well Sample" and "Q3 2013 Well Sample," include 76 and 71 SandRidge-operated Mississippian wells that were turned in-line during the second and third quarters of 2013, respectively. These two samples capture a vast majority of Mississippian wells that SandRidge drilled in Oklahoma and for which test data has been filed. The samples do not include Kansas wells (Woodford wells are purposefully excluded). For reference, SandRidge reported that it "delivered" 111 Mississippian wells during the second quarter of 2013 and 104 Mississippian wells during the third quarter of 2013 across the entire play.

The "Q4 2013 Well Sample" includes 49 wells for which production test data has been filed, and captures an estimated two-thirds of Mississippian wells that SandRidge will have drilled during the fourth quarter in Oklahoma (over two dozen additional wells have been reported as "spud" but did not have test results available as of the date of submission).

(click to enlarge)
(Source: Zeits Energy Analytics)

The comparison across the three well groups shows that, based on test results, SandRidge's well performance during the third quarter was considerably weaker that during the preceding quarter. The weakness in performance is particularly noticeable in the average 24-hour oil production test rates that declined from 262 barrels per day per well to 149 barrels per day per well.

It appears that the decline was attributable to the quarter's high percentage of wells that tested with very weak oil rates of 100 barrels per day or less - a remarkable 52% of all wells. On the other hand, the percentage of strong and outstanding wells - those with 24-hour test rates of 400 barrels of oil per day or higher - was just 8%. These two figures compare to 39% and 18% respectively during the second quarter.

If the production test data is anything to go by, SandRidge's fourth quarter promises to be much stronger than the third one. The 49-well sample shows an improvement in the percentage of wells, with weak test results on the oil side: sub-100 barrel per day wells represent "just" 34% of the total. At the same time, the fourth quarter shows a strong increase in the average natural gas test rate relative to the previous two quarters.

It is important to note here that the 24-hour production test rate used in this analysis represents a very different metric than the 30-day IP rates reported by the company in its quarterly press releases or the first-month rate used as a parameter in the company's type curve. Moreover, in select cases, the test rate may be an inaccurate predictor of the well's peak 24-hour rate or peak 30-day rate.

SandRidge conducts its typical 24-hour production test (for reporting purposes) about three weeks after the date of the well's first production date (although the test may occur as early as ten days or as late as two months after the first production). While the majority of the wells are likely to have "cleaned up" (the larger part of the frac fluid volume has been recovered) by the time of the test, some may still have significant amounts of frac fluids flowing back. Chokes and flow regimes (free flowing vs. gas lift vs. pumping) differ from well to well. As a result, the test rate represents an imperfect and "noisy" indicator of the well's early productivity.

Further complicating the story is the high variability of decline profiles exhibited by wells in the Mississippian. As a result, the correlation between the well's production test rate (or any IP rate, for that matter) and EUR is imperfect.

Nonetheless, well test data can be quite valuable and provides at least a qualitative picture of operating performance (it is hard to imagine that a well pumping 50 barrels of oil per day at 120 psi after three weeks on production is going to turn into a strong, or even commercial, producer).

The data may also provide a very valuable insight into how the company's current quarter is shaping up relative to previous quarters.

Type Curve Comparison

It would be incorrect to try to derive a relationship between the rates observed in the 24-hour production tests and the 30-day rate that anchors the type curve. However, it might be useful to provide the type curve that the company is currently using for reference purposes.

The company's type curve is based on the 30-day oil production rate of 140 barrels of oil. On a two-stream equivalent basis (6:1 conversion), the 30-day IP rate would be ~271 Boe/d (which is calculated as the 30-day oil rate plus 30-day wellhead wet gas rate).

The theoretical 24-hour peak IP rate implied by the curve would be higher than the 30-day IP rate.

Given that the production test rate in many cases understates the peak 24-hour IP rate, the Q2 2013 Well Sample and Q4 2013 Well Sample described above show production test results that, generally speaking, exceed the type curve.

(click to enlarge)

(click to enlarge)

(Source: SandRidge Energy January 9, 2014 Investor Presentation)

Conclusions

SandRidge's fourth quarter average well results may show a sequential improvement and may come close to the average for the first half of the year (which the company has characterized as "above type curve" in terms of well performance).

While stronger well results during the fourth quarter is very positive and welcome news, it is hard to view the third quarter as just an "aberration": the variability of test results remained extremely high throughout the entire year and in that regard the third quarter was in fact "typical."

The variability in the company's well test data is likely a reflection of the play's geology rather than shortcomings in the way the company executes its wells (after all, SandRidge will soon have close to one thousand operated wells "under its belt"). Given that well productivity in the Mississippian is strongly influenced by the presence and connectivity of natural fracture networks as well as various other petro-physical qualities that change unpredictably and often over very short distances, the problem may not have an easy solution.

While the "statistical" nature of well results is common for all shale plays, the low predictability of results in the Mississippian is almost extreme. Even during the fourth quarter, when SandRidge's production test results show improved stability, the percentage of wells with weak oil rates (i.e., potentially non-commercial wells) remains surprisingly high. The fact is particularly concerning given that the company has prioritized drilling on what it refers to as its "focus areas."

(click to enlarge)

(click to enlarge)

(Source: Oklahoma Corporation Commission; Zeits Energy Analytics)

Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment adviser capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings, and consult a qualified investment adviser. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Source: Can SandRidge Find A Solution For The Variability Of The Mississippian Play?