In the first two parts of this series we covered Kodiak's (NYSE:KOG) upside given the new record Whiting (NYSE:WLL) well in its Tarpon Prospect. This is obviously bullish for Whiting, along with Newfield (NYSE:NFX) and other players in the area.
Continental (NYSE:CLR) may have had the biggest announcement from a total resource standpoint, when compared to those I stated earlier. Its Charlotte 2-22H targeted the second bench (the one below the upper Three Forks) and tested at 1140 Boe/d. This result was in Banks Field, which is to the southeast of Whiting's record Twin Valley Field well, and in the same field with three Kodiak Koala wells still on confidential status. Continental found throughout its acreage that this second bench was the most uniform, but the third and fourth are more localized and look commercial depending on where the well is. Continental stated it is possible (depending on the area) that it could drill 4 Bakken and 4 upper Three Forks wells. As for the second, third and fourth bench of the Three Forks it is possible, given the results of 4 addtional wells/bench. This is all speculation, but does add significant upside to players in this area. Continental also alluded to the possibility of oil migration downward from the upper Three Forks (First Bench) to the second bench. The way these payzones are situated could increase EURs from 500000 Boe to 1000000 Boe. This is all speculation, but if correct it would be a home run situation for the Williston Basin players.
It is using a standard 30 stage frac design with an average well cost of $8 million. It has seen a leveling out of pressure pumping costs, and thinks these charges could begin to pull back in the short term. In the third quarter, Continental added 22600 net acres in Williams and McKenzie counties. General area has had many of its best 2011 wells. Continental has improved its oil differentials by reducing the volume sent to Cushing. Some is piped to Minnesota and Wyoming, with the rest sent by rail to Louisiana.
The premium seen for Louisiana Light Sweet more than covers the increased cost of transport. A very interesting point made by Mr. Hamm is his take on Cushing and the tightening of the differentials of WTI vs. Brent. He believes this has already begun. I think the recent tightening has more to do with the price of world oil (Brent) decreasing because of the fear of financial collapse in Europe. Mr. Hamm also sees in 3 to 6 months a relief caused by the Seaway Pipeline. Conoco (NYSE:COP) has said they would be selling and there are interested parties. Longer term, Mr. Hamm states the first segment of the Keystone XL from Cushing to Houston will provide a much larger, long term relief.
I am a little hesitant to get excited about WTI pricing tightening to the price of Brent for several reasons. I don't think Libyan oil production will be back to 100% anytime soon, and it may never reach those levels again. History dictates the destruction of oil producton capacity in war can take years to recover. I also do not think the Keystone XL or any major pipeline will be completed soon. It seems environmentalists can find all sorts of amphibians and rodents to protect when we try to build pipeline infrastructure. I do think it will get done at some point, but I am not betting on it being soon.
Whiting's third quarter was excellent. It has some of the best well costs in the Williston Basin. It has been drilling its Sanish wells for approximately $6 million. One of its frac crews was forced to use ceramic proppant in a few wells due to a sand shortage. This increased well costs by $850000 but Whiting states the problem has been resolved. This is a good reason to take a look at Carbo Ceramics (NYSE:CRR), which posted a great third quarter. Of Whiting's new wells, the non-operated have an average well cost of three million dollars more than its new operated wells. This company may be the best way to play the price of proppant and the high price and shortage of sand. Whiting has been able to keep the cost of frac sand down, which has significantly increased its margins. Well costs have averaged $6 to $7 throughout the Bakken/Three Forks. Whiting sees pressure pumping costs flattening in 2012 sometime.
Whiting's Tarpon Federal 21-4H has the highest IP rate in the Williston Basin. It is not only exciting for Whiting, but for all of the players near this well. Because this result was so much better than any of the prior Bakken wells, it may indicate this area is not only better than Sanish Field, but the best field in this play. Whiting's estimate of Tarpon and Hidden Bench to the south shows a very thick middle Bakken and upper Three Forks payzones. Whiting stated it drilled and completed this well with no significant differences. This well seems better because of the source rock and not because of Whiting execution.
There are several catalysts in McKenzie County going into the fourth quarter of this year. Just as the Sanish and Parshall fields were hyped, we may begin to see the same in this area of the Bakken. There has not been much development in Twin Valley and surrounding fields and this is why there are few rigs in the general vacinity. Burlington has a rig drilling two miles north and another seven miles to the east of Twin Valley. PetroHunt has a rig drilling to the southeast in Clear Creek and Continental to the southwest in North Tobacco Field. A little further away these companies have rigs:
- Denbury (NYSE:DNR) Siverston Field: Serrahn 41-6SWH
- Denbury Siverston Field: Satter 34-25NEH
- Denbury Siverston Field: Satter 34-25SEH
- Continental North Tobacco Garden Field: Rochester 1-24H
- Denbury North Tobacco Garden Field: Jore 34-22 NWH
- Continental North Tobacco Garden:Durham 1-2H
- Oasis (NYSE:OAS) Camp Field: Brier 5200 42-22H
- SM Energy (NYSE:SM) Wildcat Field: Leiseth 1-24H
All of these wells will help to paint a better picture of the resource potential in Banks, Sand Creek, Elidah and Westberg (see Newfield results). Costs seem to be under control for most companies working the Bakken/Three Forks, although frac sand shortages have been seen forcing the use of more proppant. Well service costs are expect to flatten off sometime in 2012. The most important variable is very good to great results in the Bakken and Three Forks formations, plus three possible new payzones. Kodiak seems to have the most to gain here, and this is why we have seen the stock break out over the past couple of weeks. Oasis is in this area also, but is further west.
Additional disclosure: This is a list of companies with interests near Twin Valley Field, it is not a buy recommendation.