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Michael Filloon, Split Rock (390 clicks)
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Denbury's (DNR) divesting of its Bakken acreage was no surprise. It has built a very good business around EOR in the Gulf Coast and Rockies regions. Denbury's acquisition of Encore provided EOR acreage, but also a large Bakken leasehold. Denbury has run a decent Bakken program which has provided oil production growth to its steady EOR production. Since it purchased the acreage, costs have increased. These increases have led to lower IRRs, which has hurt margins. Historically, its EOR F & D costs have been lower than the Bakken, but it doesn't provide the large increase in oil production.

Exxon (XOM) paid $1.6 billion for 196000 net Bakken acres. This acreage is estimated to average 15000 Boe/d over the second half of 2012. This was a bargain for Exxon, as it also gave Denbury operating interest in Webster Field located in southeast Texas, and Hartzog Draw Field located in northeast Wyoming. Denbury has also agreed to purchase CO2 reserves. Webster Field is currently producing 1000 Boe/d with 86% being oil. Denbury is the operator of Webster, holding 99.4% working interest. Hartzog Draw Field is currently producing 2600 Boe/d with 52% being oil. It has working interest in two zones, one 83% and the other 67%.

Exxon's (dba XTO Energy) new Bakken acreage is very good. The majority of this leasehold is in northeast McKenzie and northwest Dunn counties. Some of the Williston Basin's best wells have been completed in this area. Operators include Kodiak (KOG), Newfield (NFX), and Whiting (WLL).

2011/2012 Denbury Siverston Field Results
Well lateral Choke Stages Water Proppant IP Rate 90 day IP Date
Johnson 11-5SEH 8977 12/64 24 2555319 3170200 626 349 8/11
Johnson 31-6SWH 9461 18/64 24 2087610 2391309 884 374 5/11
Wolff 13-24ENH 9703 24/64 26 2340179 2786400 1801 429 8/11
Serrahn 41-6SWH 9591 24/64 26 2669940 3136003 1514 441 1/12
Satter 31-1SWH 9102 19/64 26 102181? 2400062 1419 410 11/11
Sorenson 31-28SWH 9898 16/64 22 2119782 2241355 780 450 1/12
Loomer 21-4SWH 9453 14/64 20 2180598 2782136 1294 475 11/11
McCoy 44-23NWH 9670 24/64 26 2460066 2845230 1609 453 9/11

To give a comparison of results, I have included wells that were completed in Siverston Field by Encore, before the Denbury acquisition.

Encore Siverston Field Well Results
Well Lateral Choke Stages Water Proppant IP Rate 90day IP Date
Koeser 41-15SWH 9022 24/64 24 2356044 2887940 1287 337 6/11
Lundin 11-15SEH 9393 25/64 20 2455320 3068687 1667 449 7/11
Rolfson 11-16NEH 10041 18/64 26 5178558 2950243 1849 445 10/11
Rolfson 21-16SEH 9336 30/64 26 5225808 3176960 1411 536 10/11
Lee 34-31NWH 9431 20/64 24 2140865 2887940 1620 501 7/11
Sorenson 34-32NWH 9387 20/64 19 2443351 2959860 1261 403 8/11
Satter 44-34NWH 8636 18/64 20 1931706 2945305 3000 495 5/11

Denbury's results weren't any better than Encore's and in my opinion were worse while Denbury was the operator. With respect to the 90 day IP rate, Encore had three wells with better results than Denbury's top well. These results get very interesting when results from a better operator are used. Newfield is one of the top Bakken operators. The table below shows its results in Siverson Field.

Newfield's Siverston Field Results
Well Lateral Choke Stages Water Proppant IP Rate 90day IP Date
Lawlar 151-98-31-30-1H 9569 36/64 38 3482304 3976810 2789 682 7/11
Syverson 150-99-36-25-1H 9545 36/64 32 2650662 3840119 2301 694 10/11
Holm 150-99-13-24-1H 9418 36/64 38 2895144 4052700 2370 653 8/11
Hoffmann 150-98-18-19-1H 9091 36/64 31 2215710 3143246 2502 658 8/11

Although Denbury's results have been good, it has had poor results in Siverston Field when compared to other producers. There are several variables that influence production in horizontal wells, and all increase costs. The number of stages (remember this is influenced by lateral length), volumes of water, hydraulic horsepower, pounds of proppant and type of proppant all improve results.

A simplified explanation of the tables above will help in understanding why each is important. Lateral length is fairly simple as the longer the lateral the larger area of the formation can be stimulating in the fraccing process. This is where the number of stages becomes important. By dividing the lateral length by the number of stages, we see the length of each stage. As a general rule, the shorter length of each stage will allow for more pressure and hopefully will produce a better stimulation of the formation. The more hydraulic horsepower (more pump trucks) used, the greater the pressure. These three variables help crack more shale, which should in theory produce more resource. Once the formation is fracced, the cracks the shale need to be propped open. If no proppant is used, these fractures will close up and shut off the resource from the well. The amounts of water and proppant are very important. The water, frac fluids and proppant are pushed into the shale fractures. The more water used, the further the proppant is pushed into the cracks. The better the shale is propped open the more resource is garnered. The type of proppant is also important. Sand is much cheaper than ceramic covered sand and ceramic proppant. Sand will be crushed over time under the pressure of the formation which causes an increased depletion. Ceramic covered sand props the formation open longer as it has better strength. Ceramic proppant is much better than both, as it not only holds the reservoir open better and longer, it is uniform in shape and size, providing maximum porosity. This allows for more resource to flow.

This acreage is in better hands now that Exxon is the operator. Middle Bakken EURs by prospect:

  1. Charlson: 1000 MBoe
  2. Cherry: 850 MBoe
  3. Camp: 700 MBoe
  4. Bear Creek: 800 MBoe
  5. Murphy Creek: 700 MBoe

In summary, Exxon looks to have gotten a very good deal. Denbury spent the majority of its time focusing on costs which hurt production. It received additional EOR acreage and production in the deal, but long term Exxon got what it wanted. The poor Denbury wells will most likely be re-completed boosting production with a much lower investment than would be needed to drill new wells. Much of Denbury's acreage is held by production, so Exxon will begin pad drilling in its best acreage. Much of this acreage is in McKenzie County, which is prospective the middle Bakken and up to four benches of the Three Forks. There are also other vertical targets as well. After these formations have been worked, waterfloods will garner further resource. In the end, it's a win-win situation for both players, but in my opinion Exxon got the better end of the deal.

Source: Bakken Update: Exxon's Purchase Of Denbury's Acreage Is A Win-Win Situation

Additional disclosure: This is not a buy recommendation. Lateral Length is measured in feet. Water is measured in gallons. Proppant is measured in pounds.