Bakken Update: RSP Permian's Silver Hill Acquisition Was A Great Deal, As Well Economics Are Phenomenal

| About: RSP Permian (RSPP)

Summary

The Acreage in Loving County has eight proven intervals, with the Wolfcamp providing very good economics at $50/Bbl.

RSPP only strengthens its position, as its Loving acreage may be better than its core in Midland.

The average Silver Hill well economics in 2016 have a type curve that produces a net of over $3 million in just 31 months.

RSPP has a high ceiling in Loving, because its well design is much better than Silver Hill's so well performance should improve.

Well results have driven recent acquisitions in the Delaware Basin. Not only do these locations respond well to enhanced completions, or Mega-Frac's, decline rates are low. When coupled with low well costs, the area becomes very attractive. Acquisitions have been all over the Basin, which extends from New Mexico down into west Texas.

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(Source: Concho)

The Delaware Basin runs from Eddy and Lea counties in the north down to Pecos County in the south. Parsley Energy (NYSE:PE) purchased 30,000 acres in Reeves, Ward, and Pecos counties. PDC Energy (NASDAQ:PDCE) acquired acreage in Reeves and Culberson counties. Diamondback (NASDAQ:FANG) purchased in Reeves and Ward counties. Resolute (NYSE:REN) added in Reeves. Concho (NYSE:CXO) added in Reeves and Ward. WPX (NYSE:WPX) entered the basin in Eddy, Lea, Loving, Winkler, and Reeves last year. EOG (NYSE:EOG) purchased Yates. Silver Run purchased Centennial and became Centennial Resource Development (NASDAQ:CDEV). These are just a few of the deals, but the interest has remained high. Smaller players have been motivated to sell due to the low price of oil. Operators with the means, took the opportunity to acquire leasehold.

RSP Permian (NYSE:RSPP) entered the deepest part of the basin, in a $2.4 billion deal. Its acreage is located in Loving and Winkler counties.

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(Source: RSP Permian)

We really liked this purchase based on the location. 41,000 net acres may not seem huge when looking at deals in other US plays. It is a huge deal, based on the large number of intervals. Looking at horizontal acres (if we consider all of the intervals and locations that can be drilled per section) it comes out to 512,000 net acres. It contains 5,800 economic locations.

(Source: RSP Permian)

This seems to be an excellent choice, as the acreage is continuous. It is also in the deepest and thickest part of the Wolfcamp.

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(Source: RSP Permian)

RSPP's Midland core acreage is excellent. Pioneer (NYSE:PXD), Occidental (NYSE:OXY), Apache (NYSE:APA), Exxon (NYSE:XOM), Chevron (NYSE:CVX), Energen (NYSE:EGN), Encana (NYSE:ECA), Conoco (NYSE:COP), Laredo (NYSE:LPI), QEP Resources (NYSE:QEP), Callon (NYSE:CPE), Clayton Williams (NASDAQ:CWEI) and Devon (NYSE:DVN) have acreage near and around RSPP's.

RSPP's Delaware leasehold has a combined thickness of 4,500 feet compared to 1,800 in Midland. The majority of Delaware intervals produce more resource per foot on a BOE basis. IRRs are a little better in Midland, but natural gas percentages are higher in the west. Silver Hill has completed 37 wells.

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(Source: Welldatabase.com)

34 wells are in Loving and the other 3 in Winkler County. 24 locations are horizontals and 13 verticals.

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(Source: Welldatabase.com)

The first vertical well was drilled back in 1982. More verticals were completed later, and some wells were targeting gas. This is why we see a natural gas (red) spike in 2004. Horizontal wells targeting liquids began producing in 2012 which was the start of the increase in oil (green) production and water (NASDAQ:BLUE). The number of wells (black) climbed quickly from 2013. Cumulative oil production is 2.8 MMBO and natural gas is 10.03 Bcf. The spike in production is the result of some very good results in this core area. If we only calculate cumulative production from horizontals it decreases to 2.57 MMBO and 3.78 Bcf.

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(Source: Welldatabase.com)

All of the 24 horizontals are in Loving County. Gas production decreases significantly, while crude volumes change little. There was a marked decrease in both oil and gas production recently. Production has been dialed back due to low oil prices.

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(Source: Welldatabase.com)

The above chart stacks the 24 completion's type curve. It provides an idea of the differences in production over time. The improvement since the first horizontal was turned to sales is significant. This matches leasehold throughout the Permian, as 2 nd and 3 rd generation designs provide an uptick in production of oil and natural gas.

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(Source: Welldatabase.com)

All 24 horizontals are in Texas. The map above provides a Texas survey (abstract). The New Mexico border is just north of its leasehold.

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(Source: Welldatabase.com)

Six horizontal wells were completed up to 12/31/14. The type curve above is for those six locations. I have also provided the production data below.

Month

Oil

Gas

BOE

Water

1

10.9 Mbbl

8.33 MMcf

12.33 MBOE

33.97 Mbbl

2

7.94 Mbbl

11.13 MMcf

9.86 MBOE

27.49 Mbbl

3

5.47 Mbbl

7.32 MMcf

6.73 MBOE

20.16 Mbbl

4

5.93 Mbbl

10.28 MMcf

7.71 MBOE

21.74 Mbbl

5

5.62 Mbbl

7.68 MMcf

6.94 MBOE

17.32 Mbbl

6

4.57 Mbbl

4.98 MMcf

5.43 MBOE

14.14 Mbbl

7

3.80 Mbbl

4.23 MMcf

4.53 MBOE

8.34 Mbbl

8

3.66 Mbbl

4.06 MMcf

4.36 MBOE

8.00 Mbbl

9

3.15 Mbbl

4.32 MMcf

3.90 MBOE

6.65 Mbbl

10

2.36 Mbbl

3.43 MMcf

2.95 MBOE

7.11 Mbbl

11

1.61 Mbbl

2.15 MMcf

1.99 MBOE

4.28 Mbbl

12

2.26 Mbbl

4.58 MMcf

3.05 MBOE

6.96 Mbbl

13

2.20 Mbbl

3.36 MMcf

2.78 MBOE

11.68 Mbbl

14

1.91 Mbbl

3.01 MMcf

2.43 MBOE

8.44 Mbbl

15

1.64 Mbbl

2.19 MMcf

2.02 MBOE

4.45 Mbbl

16

1.76 Mbbl

1.98 MMcf

2.10 MBOE

4.25 Mbbl

17

1.61 Mbbl

3.10 MMcf

2.14 MBOE

8.56 Mbbl

18

1.75 Mbbl

2.71 MMcf

2.21 MBOE

7.32 Mbbl

19

2.54 Mbbl

5.68 MMcf

3.52 MBOE

0.00 bbl

20

3.52 Mbbl

7.47 MMcf

4.81 MBOE

0.00 bbl

21

3.26 Mbbl

5.15 MMcf

4.15 MBOE

0.00 bbl

22

3.22 Mbbl

5.66 MMcf

4.20 MBOE

0.00 bbl

23

2.24 Mbbl

5.54 MMcf

3.20 MBOE

0.00 bbl

24

3.51 Mbbl

8.06 MMcf

4.90 MBOE

0.00 bbl

25

2.89 Mbbl

6.43 MMcf

4.00 MBOE

0.00 bbl

26

1.75 Mbbl

4.88 MMcf

2.59 MBOE

0.00 bbl

27

2.93 Mbbl

9.22 MMcf

4.52 MBOE

0.00 bbl

28

4.67 Mbbl

8.37 MMcf

6.11 MBOE

0.00 bbl

29

6.12 Mbbl

7.10 MMcf

7.34 MBOE

0.00 bbl

30

3.33 Mbbl

3.71 MMcf

3.97 MBOE

0.00 bbl

31

3.03 Mbbl

3.45 MMcf

3.62 MBOE

0.00 bbl

32

5.24 Mbbl

5.60 MMcf

6.20 MBOE

0.00 bbl

33

7.08 Mbbl

6.06 MMcf

8.13 MBOE

0.00 bbl

34

4.88 Mbbl

4.35 MMcf

5.63 MBOE

0.00 bbl

35

9.14 Mbbl

11.11 MMcf

11.06 MBOE

0.00 bbl

36

7.00 Mbbl

8.33 MMcf

8.44 MBOE

0.00 bbl

37

4.69 Mbbl

3.78 MMcf

5.34 MBOE

0.00 bbl

38

9.00 Mbbl

5.86 MMcf

10.01 MBOE

0.00 bbl

39

7.03 Mbbl

4.56 MMcf

7.81 MBOE

0.00 bbl

40

5.74 Mbbl

5.55 MMcf

6.70 MBOE

0.00 bbl

41

5.62 Mbbl

4.87 MMcf

6.46 MBOE

0.00 bbl

42

4.81 Mbbl

2.31 MMcf

5.21 MBOE

0.00 bbl

43

2.01 Mbbl

1.26 MMcf

2.23 MBOE

0.00 bbl

Click to enlarge

(Source: Welldatabase.com)

A type curve is generated by aligning of all production streams based on months since first production. It is useful to help understand the average production life for a group of wells. In this case it is Silver Hills first six locations.

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Silver Hill completed 11 horizontals from 12/31/14 to 10/31/15. The type curve is provided by the chart above and the data below.

Month

Oil

Gas

BOE

Water

1

12.01 Mbbl

15.75 MMcf

14.72 MBOE

0.00 bbl

2

13.23 Mbbl

18.59 MMcf

16.43 MBOE

0.00 bbl

3

11.16 Mbbl

18.06 MMcf

14.28 MBOE

0.00 bbl

4

11.16 Mbbl

17.08 MMcf

14.10 MBOE

0.00 bbl

5

10.00 Mbbl

16.58 MMcf

12.86 MBOE

0.00 bbl

6

9.01 Mbbl

14.90 MMcf

11.58 MBOE

0.00 bbl

7

8.34 Mbbl

11.60 MMcf

10.34 MBOE

0.00 bbl

8

7.70 Mbbl

9.57 MMcf

9.35 MBOE

0.00 bbl

9

6.92 Mbbl

10.15 MMcf

8.68 MBOE

0.00 bbl

10

5.59 Mbbl

9.57 MMcf

7.24 MBOE

0.00 bbl

11

5.04 Mbbl

9.07 MMcf

6.60 MBOE

0.00 bbl

12

4.65 Mbbl

6.53 MMcf

5.77 MBOE

0.00 bbl

13

5.74 Mbbl

8.12 MMcf

7.14 MBOE

0.00 bbl

14

5.13 Mbbl

8.56 MMcf

6.61 MBOE

0.00 bbl

15

5.60 Mbbl

8.66 MMcf

7.09 MBOE

0.00 bbl

16

8.86 Mbbl

12.83 MMcf

11.07 MBOE

0.00 bbl

17

7.34 Mbbl

13.67 MMcf

9.70 MBOE

0.00 bbl

18

2.31 Mbbl

2.37 MMcf

2.72 MBOE

0.00 bbl

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(Source: Welldatabase.com)

It completed 5 horizontals from 10/31/15 to the present.

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(Source: Welldatabase.com)

The data improved significantly from the locations prior.

Month

Oil

Gas

BOE

Water

1

17.27 Mbbl

26.36 MMcf

21.82 MBOE

0.00 bbl

2

17.14 Mbbl

30.17 MMcf

22.35 MBOE

0.00 bbl

3

13.78 Mbbl

24.84 MMcf

18.07 MBOE

0.00 bbl

4

12.15 Mbbl

18.03 MMcf

15.26 MBOE

0.00 bbl

5

10.51 Mbbl

16.85 MMcf

13.42 MBOE

0.00 bbl

6

9.67 Mbbl

15.83 MMcf

12.40 MBOE

0.00 bbl

7

8.77 Mbbl

14.04 MMcf

11.19 MBOE

0.00 bbl

8

8.03 Mbbl

13.00 MMcf

10.27 MBOE

0.00 bbl

Click to enlarge

(Source: Welldatabase.com)

The earliest wells (first six) produced 47.89 MBO. The second set of data covered eleven completions that averaged 82.61 MBO. The last set of data was pulled from 5 wells and the 8-month average was 97.32 MBO. An even larger move was seen when natural gas was included.

Well Date

Oil MBO

MBOE

12/31/12 to 12/31/14

47.89

57.89

12/31/14 to 10/31/15

82.61

103.66

10/31/15 to 10/17/16

97.32

124.78

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The completions from December of 2012 to December of 2014 produced less than half the resource both in bbls. of oil and BOE when compared those after October of 2015. The well design changed over that time frame with sand volumes increasing from 4.5 million pounds of sand to 9 million. Lateral length has been inconsistent, with the operator drilling an average 4,700-foot lateral in the early years of development. It has done several laterals over 6000 feet, with the longest around 7,000 feet. So this has been part of the reason for the production increases, and also the increase in usage of proppant. Although this has occurred, in 2016 only one well had a lateral length over 5,000 feet. So it hasn't been enough to change things significantly. The economics are very good with respect to wells completed in 2016.

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(Source: Welldatabase.com)

I used a hyperbolic decline to figure the current production and added 2 years to provide this type curve. A $5.9-million-dollar D&C cost was used. The LOE was factored with current G&T, Exploration Expenses, Cash G&A, Recurring Non-Cash G&A, and DD&A. This came to $9.49/BOE. Tax was figured at 6.5%.

Oil Hyperbolic 0.9999999999999999

Volumetrics

EUR (BO):

239,197.02

Months:

31

Recovered (BO):

89904.50

Months:

7

Remaining (BO):

149,292.52

Months:

24

Economics

Working Interest (%):

80

Selling Price:

$50/Bbl.

Initial Capital Expense:

$5,900,000

$4,720,000

Lease Operating Cost (monthly):

$2,269,975.00

$1,815,980

Tax Rate (%):

6.5

Gross:

Total

Working Interest

Total:

$11,959,851.12

$9,567,880.89

Recovered:

$4,495,225.00

$3,596,180.00

Remaining:

$7,464,626.12

$5,971,700.89

Total

Working Interest

Total:

($8,169,975.00)

($6,535,980.00)

Recovered:

($6,412,575.00)

($5,130,060.00)

Remaining:

($1,757,400.00)

($1,405,920.00)

Total

Working Interest

Total:

$3,789,876.12

$3,031,900.89

Recovered:

($1,917,350.00)

($1,533,880.00)

Remaining:

$5,707,226.12

$4,565,780.89

Click to enlarge

(Source: Welldatabase.com)

The most recent wells produce a net of over $3 million after just 31 months. That is a pretty good result considering we did not figure natural gas sales. If we do the same hyperbolic decline, over 31 months and a natural gas price of $2.75/Mcf would produce additional revenues of $908,123 over 31 months.

In summary, RSPP looks to have made a very good purchase. It needed to add acreage, and this core area of the Delaware looks to be a good fit. Not only are current well economics very good, RSPP has done a very good job of improving well design in Midland. We would guess the same will happen in the Delaware, which should improve economics more. RSPP's Permian acreage is excellent even at low oil prices. $50/bbl. seems to be very good, but $60/bbl. would be outstanding. It is obvious the Permian has a big advantage when compared to other US basins. This will no doubt continue to improve as more intervals are tested, downspacing is tightened and well designs improved. RSPP is in an excellent position going forward.

Disclaimer: This article is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. Well data is provided by Welldatabase. Accordingly, the publication of articles should not be construed by any consumer and/or prospective client as a solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the internet. This information is provided for guidance and information purposes only. This information is not intended to provide investment, tax, or legal advice. The information contained herein has been compiled from sources deemed reliable and it is accurate to the best of our knowledge and belief. However, I cannot guarantee its accuracy, completeness, and validity and cannot be held liable for any errors or omissions. All information contained herein should be independently verified and confirmed. Hartstreet LLC does not accept any liability for any loss or damage whatsoever caused in reliance upon such information. Readers are advised that the material contained herein should be used solely for informational purposes. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.

Disclosure: I am/we are long APA, CDEV, CVX, CXO, DVN, ECA, EGN, EOG, FANG, PDCE, PE, PXD.

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.