Last week, Continental Resources (NYSE:CLR) hosted its annual meeting for analysts and investors in Oklahoma City. Two key highlights dominated the Bakken section of the presentation: the lower Three Forks potential and the 160-acre down spacing. While both concepts have been broadly discussed in the industry and without doubt are on many Bakken-focused operators' drawing boards, Continental is perhaps the first among its peers to commit significant capital to testing both ideas and initiate several full-scale pilots. Continental's presentation contained a lot of insightful information that is rarely put together in one place for the investing public.
Lower Three Forks Benches
Continental provided well performance results for its first two assessment tests in the Three Forks' second bench (TF2). The results are very encouraging as the demonstrated EURs are without doubt very economic.
The typical structure of the Bakken deposition is presented in the picture below.
To date, the vast majority of the wells - 4,298 wells, or 85 percent of the total, - have targeted the Middle Bakken dolomite which is sandwiched between two layers of low permeability shale (the Upper and Lower Bakken). Another 752 wells, or 15 percent of the total, have been completed in the upper section, or the first bench, of the Three Forks interval that lies immediately underneath the Bakken group. Continental takes credit for championing the concept that the lower Three Forks members, which include benches 2, 3 and 4 (TF2, TF3, and TF4 zones in the picture), are in fact isolated oil-bearing intervals that are separated from each other with lower permeability rock and can be produced independently.
While very few lower bench assessment tests have been drilled (or disclosed) by the industry, the tenor of Continental's presentation was very confident, sounding almost as if the success of the deeper Three Forks development over a significant part of the play was a fait accompli. Continental may have good reasons for optimism. Being a pioneer of the Three Forks play and having drilled every fourth well targeting the interval, Continental has very strong credentials as it comes to the Three Forks' geology. In addition to the two TF2 wells that CLR has on production and a TF3 test that is currently waiting on completion, the company relies on the 10-well coring program in the deeper Three Forks, which is an important building block in understanding the properties of the deposition and delineating the acreage. The location of the core tests is shown in the picture below.
The first TF2 well described in the presentation (picture below), the Charlotte 2-22H, is operated by Continental and has been on production for about ten months. The well has produced 87 MBoe to date and is currently on pump producing 167 Boe/d. Continental has assigned a 561 MBoe EUR to this well. The second, non-operated, TF2 well, the Sunline 11-1TF, has been on production for six months. The well has been assigned a 696 MBoe EUR and is currently flowing at a rate of 242 Boe/d. The production results confirm the strong oil shows seen from the core analysis and are strong enough to demonstrate the potentially significant commercial value of the deeper Three Forks resources.
Continental is moving ahead with three separate full-scale pilots that will test the simultaneous productivity of four intervals: the Middle Bakken, TF1, TF2, and TF3.
Each test will involve three or four wells per zone drilled in a staggered pattern on 1,280-acre production units. The two bigger pilots will consist of 14 wells each, and the smaller test will consist of 11 wells.
It is important to note that even at $8 million per well, one four-zone pilot will cost over $110 million and may take over a year to drill and complete. Upon completion, at least a year of production history will be required to assess possible interference between the wells. While early flow test results from the pilots should be available in early 2014, the complete assessment results will not be known until 2015. Even if the results prove positive, additional extensive delineation will be required to confirm the areal extent of the commercially viable deeper Three Forks.
The big open question relates to the potential communication between completions in different Three Forks zones. Given that the Three Forks, even in its thickest parts, is thinner than 300 feet, fracture systems created by a completion in the third bench, for example, could potentially penetrate all other benches. Assuming a staggered wellbore development as shown in the picture above, the interference of the fracture system associated with well in the third bench with the fracture system of the well in the first bench, which is located less than seventy feet above in this case, could potentially be significant and could limit the viability of the deeper benches drilling.
160-Acre Down Spacing
In its presentation, Continental indicated that it sees very little interference between wells drilled with a 320-acre density in both the Middle Bakken and upper Three Forks (i.e., four long-lateral wells per interval per 1,280-acre drilling unit). This conclusion is based both on Continental's analysis of performance of 156 well pairs (CLR's and wells drilled by others). The separation between two adjacent wellbores in the same zone in a 320-acre down spaced pattern is approximately 1,320 ft. However, the distance between a Bakken wellbore and the nearest wellbore in the Three Forks zone is less, close to 660 ft.
Continental is moving ahead with a pilot to evaluate the viability of a 160-acre down spacing. The pilot will be drilled in four intervals - the Middle Bakken and three upper benches of the Three Forks (TF1, TF2, and TF3). It should test the interference between wells within the same interval as well as between different intervals. The pilot's 14 wells will be drilled from March 2013 through March 2014.
In its presentation, Continental shared results of a computer simulation prepared by Ryder Scott for a hypothetical 160-acre down spacing. According to Continental, the model was based on a relatively high permeability assumption (which should translate in conservative estimates).
The simulation shows that a 160-acre down spacing translates into an incremental reserve recovery per incremental well equal to 75% relative to the average per well recovery on a 320-acre down spacing. This is how the math works. Let's assume that the first well drilled on the unit recovers 1.0 MMBoe. A 320-down spacing, which implies 4 wells per unit, would recover 3.2 MMBoe in total, or 800 MBoe per well. A 160-acre down spacing, which implies 8 wells per unit, would recover 5.6 MMBoe in total, or 600 MBoe per incremental well relative to the 320-acre case. Based on these simulation results, a 160-acre down spacing should be economically viable within sweet spots, but may be uneconomic in less productive areas. However, it would not be surprising if the field tests showed less interference between wells than suggested by this simulation model.
Continental is taking very active steps to prove up the extended resource potential of the Bakken play. Other operators will likely follow on the same track. The potential resource additions from both the deeper Three Forks benches and the 160-acre down spacing initiatives may take several years to be confirmed by field data but could be very significant. However, the valuation impact on the stocks may not be immediate and will likely be less pronounced than the growth in potential resources.
Continental already has a decade-long inventory of drilling locations. Intuitively, it appears that the Middle Bakken and upper Three Forks, which are located higher in the stack, have greater productive potential than the lower Three Forks benches, everything else being equal. The Middle Bakken and the upper Three Forks are also better delineated and ready for full-scale development while the lower Three Forks benches are just entering the early exploration stage. Sweet spots are yet to be identified. In the event incremental drilling locations in the lower Three Forks benches and from higher spacing density prove to have lower productivity, those locations (except select sweet spots) will effectively be added at the end of the multi-year development queue and their value should be discounted accordingly.
Having said that, the strong early TF2 test results and the very encouraging tone of Continental's investor day without doubt have a positive read-across to other Bakken-focused stocks. My Bakken-focused stock index includes:
- Continental Resources
- EOG Energy (NYSE:EOG)
- Kodiak Oil & Gas (NYSE:KOG)
- Newfield Exploration (NYSE:NFX)
- WPX Energy (NYSE:WPX)
- Oasis Petroleum (NYSE:OAS)
- QEP Resources (NYSE:QEP)
- Whiting Petroleum (NYSE:WLL)
- Enerplus (NYSE:ERF)
- Triangle Petroleum (NYSEMKT:TPLM)
Disclaimer: This article is not an investment recommendation and does not provide a view on the value or price direction of any security. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor.
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.