There are several reasons we have seen big improvements in initial production rates over the past year. Some are due to less restrictive chokes, which improve production in the short term, but are not necessarily a good indicator of longer term production. Oil producers have been doing a better job of drilling as they get more comfortable with the geology, and this is very important, but difficult to measure for the average investor. The most important variable in my opinion is the number of stages. Brigham (NYSE:STO) was the first to use 40 stage fracs, and because of this had 9 of the top 10 IP rates in the Williston Basin. Other producers have started to get more aggressive and because of this, I believe we will get significant revisions upward in estimated ultimate recoveries or EURs.
The importance of increased stages has to do with the area that is stimulated. As an example, we will use a 10000 foot lateral. If that lateral uses a 20 stage frac, each stage will be approximately 500 feet in length. If a 30 stage frac is used on that same lateral, each stage will be 333 feet. Because the stage is shorter it is better stimulated when fracced. This means increased fracturing which should equate to more oil garnered from the lateral. Oil producers realize this and have started to ramp stages. Each stage increases well costs, so many of the Bakken names have been conservative in its number. It should also be noted that this is not an infinite number, and at some point we will see ceiling to improvements. I am unsure if this number is 50 or higher on a two mile lateral, but keep in mind other methods will have to be used to increase IP rates once we hit a top to this number.
Continental Resources (NYSE:CLR) has seen a marked improvement in IP rates since the fourth quarter of last year. At this time, I began to see it had increased the number of stages used from 20 or 24 to 30. Continental uses restrictive chokes to keep well pressures higher for a longer period of time, so its IP rates are lower than other producers in the Bakken. A good way to see how much improvement we are seeing with the increased number of stages, is to compare older results with newer ones in the same general area. This should take out some of the variances in geology. Also, other variables do need to be addressed such as the amount of water and proppant used. Here are some year over year comparison's in Jim Creek Field of Dunn County:
|Name||Date||Choke||Stages||Water(Bbls)||Proppant(lbs)||60-Day IP(BO/D)||120-Day IP|
|Kelly 2-2H TF||6/10||18/64||24||46594||2110396||360||264|
|Medicine Hole 2-27H||7/10||32/64||24||41450||2065254||431||322|
|Kelling 2-4H TF||12/10||40/64||24||43139||2035369||248||246|
|Meadowlark 3-6H TF||6/11||12/64||24||51586||1593380||303||228|
|Skachenko 2-31H TF||6/11||8/64||24||49314||2218357||380||294|
In the table above, I marked all Three Forks wells with a TF after its well name. Of the nine wells, results were consistent throughout with two very good middle Bakken wells, above 600 Bo/d at the 60 day mark. Remember, these results are for oil only and does not show the amount of gas produced.
To the northeast of Jim Creek is Chimney Butte. Since there were no reported 2012 completions in Jim Creek, Chimney Butte is being used to compare these results. Chimney Butte had four 2012 results:
|Name||Date||Choke||Stages||Water||Proppant||IP Rate (Bo/d)|
|Candee 2-9H TF||3/12||18/64||30||60676||2963336||50Day=682|
The results above do show an improvement over the wells done one to two year prior. These are not the perfect numbers to use in comparison, but show a progression to 30 stage fracs, and big increases in the amount of water and proppant. The IP rate numbers are not perfect either as they show an average production over 49 to 50 days as compared to the 60 in Jim Creek. The well that jumps out is Kukla 3-16, as this middle Bakken well produced 965 barrels of oil per day over the first 50 days. It used a 29/64 choke, which is much less restrictive. This could be taken in a couple of ways. The first, and what I believe to be the most important, is the possible shift to chokes that allow the oil to flow more freely producing more oil in a shorter period of time as seen with Brigham ,Whiting (NYSE:WLL) and more recently Kodiak (NYSE:KOG). It is also possible Continental is looking to compare these well results with tighter chokes to see how it differs in production. Long term, I believe Continental will begin to move to a more wide open production method as other producers already doing it have had very good results.
In summary, Continental's production should continue to improve throughout the Willston Basin. I do not believe it will make a quick shift to less restrictive chokes, but the move to increased water, proppant and stages is seen throughout the play and a move all players are at least beginning to make. Look for these changes to produce EUR increases at year end, and I would not be surprised if we see Continental move its estimates up from 604 MBoe to 675 to 700 MBoe. Watch its competition as some are already doing 34 to 38 stage fracs consistently.