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Mark Anthony
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Mark Anthony, is an IT professional and who had a scientific research background before joining the information revolution. Visit his blog: Stockology (http://stockology.blogspot.com/)
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  • The Real Bakken Shale Well Decline

    In a previous article "The Real Natural Gas Production Decline", I discussed a simple and effective way of estimating the real declines and realistic EURs (Estimated Ultimate Recovery) of shale wells based on two things that shale gas and oil producers can not lie about: number of wells added during a period of time, and the total daily productions.

    The Simple and Effective Method of Estimating EUR

    The idea is simple. All shale wells are in steep decline. Thus as the producers put new wells into production, a considerable portion of the new production merely compensates the decline of existing wells. If we assume producers add just enough wells to exactly compensate for the decline, then the EUR times number of wells added equals the amount of production during the same period.

    Let me explain in formulas. Let the combined daily decline of existing wells be D, and IP being the Initial Production rate per well:

    Total_Production * D = IP * Well_Additions

    EUR = Total_Production/Well_Additions = IP/D

    In surveying several different shale plays, I found that all of them have a combined decline rate of 0.2% per day. Combined decline rate means the decline of the total production from existing wells. For example if the total production is 500 MMCF one day and 499 MMCF the next day, the 499-500)/500 = -0.2%/day.

    Thus, a rough estimate of EUR equals to IP/D = IP/0.2% = 500 IP, or roughly 500 days worth of production at the IP rate.

    Estimating the Bakken Shale Well Productions

    The North Dakota Mineral Resource Commission has a web site that publishes the shale well counts and monthly productions of Bakken.

    I decide to crunch some numbers to see the real productivity of the Bakken oil wells, using the idea discussed above. Let's start from the oil productions of the latest two months:

    Aug-2012: 635,177 Barrels/Day

    Sep-2012: 662,428 Barrels/Day

    Wells added: 170

    Let's do the calculation using the above numbers. The production rate increased by 27251 Barrel/Day in 30 days. So the daily increase was 908.4 Barrel/Day. Daily well addition is 170/30 = 5.67 wells/day. Let's assume the combined decline rate of D=-0.2% also applied in Bakken. The median production rate during the 30 days from mid Aug. to mid Sep. was 648,660 Barrels/Day. So the natural decline would have been 0.2% * 648,660 BPD = 1297.320 BPD. So 5.67 new wells per day not only compensates for loss of 1297.320 BPD, but also boost the production by 908.4 BPD. Thus:

    IP * 5.67 = 1297.320 BPD + 908.4 BPD = 2205.72 BPD

    IP = 2205.72/5.67 = 389 Barrels/Day

    So that's the IP per well that I estimates, 389 Barrels/Day. The EUR then would be EUR = IP/D = IP/0.2% = 500*IP = 0.1945M barrels.

    Consider that there are so far 4629 wells in d the accumulative oil production is 458.860M barrels, averaging 0.099M per well. My EUR estimate is roughly twice the accumulative oil production per well. So I think my estimate is pretty good.

    A good thing of my method is it is pretty fair. Let's say I over-estimated the D. Let's say the combined decline rate is less than I thought, repeating the same calculation, it results in a less IP as well. Since EUR = IP/D, a less value divided by a less value, gives you a result that is about the same.

    Let's try a D = -0.15% instead of -0.2% and see what I get:

    IP * 5.67 = D * 648,660 Barrels/Day + 908.4 BPD

    EUR = IP/D = 648660/5.67 + 908.4/5.67/D = 0.22121M Barrels

    This EUR result, 0.22121M barrels, is only slightly higher than previous result of 0.1945M barrels. It is only higher by 13.7%.

    Validating My Bakken Shale Well Production Estimate

    Now let's apply the idea to model the actual Bakken oil productions.

    Prod_Rate_Change = Prod_Decline + IP* Well_Additions

    Prod_Rate * D + IP * Well_Additions.

    Thus, knowing the previous month's production rate, we can calculate what the next month's production rate should be, by subtracting the decline, then add number of new wells times IP.

    Let me assume D = -0.2%/Day. I assume IP = 365 Barrels/Day. I further assume that in 2005, 2006, 2007, 2008, 2009, the IP was only 30%, 50%, 70%, 80%, 90% of the current IP level, as the technology was less sophisticated than today, and well productivity was less than what we get today. Let's see how my calculation looks like compare with actual production:

    click to enlarge)

    It looks like a perfect match. Thus my assumed values, D=-0.2% and IP = 365 Barrels/Day, a good numbers that give perfect fit. Had I used an IP higher or lower, my projection would not match the data.

    So based on that, the average Bakken shale well EUR is

    EUR = IP/D = 365 Barrels/Day / 0.2% = 0.1825M Barrels

    My EUR estimate is far below what producers have been pitching.

    Case Study on Continental Resources Shale Wells

    Let's have a look at Continental Resources (NYSE:CLR), who is considered the most successful developer of the Bakken shale oil resources.

    I pulled out CLR's most recent quarterly report. Here are a few relevant numbers:

    • Oil and gas revenue received in the quarter was $617.93M
    • Oil and gas production was 0.103M BOE/day in the quarter.
    • Oil and gas production was 0.095M BOE/day in last quarter.
    • In 3 quarters, CLR participated completion of 541 wells, net 222 that belongs to CLR. So that's 74 per quarter.
    • Capital spending for 3 quarters totaled $2584.434M

    First the capital spending of %2584.434M divided by 222 net wells completed is $11.64M per well. This is the per well capital cost, not including the production cost yet.

    What is the per well IP, and the combined decline rate D? Note that production rate increased from 0.095M to 0.103M barrels in 92 days. That's a daily increase of 86.96 Barrels/Day. If D=0.2%, the daily decline would be roughly 0.2%*0.1M/Day = 200 Barrels/Day. So the daily production increase due to new wells is 200+86.96 = 287 BPD. Daily well addition is 74 wells / 92 days = 0.804 wells/Day. Thus:

    IP = 287 BPD / 0.804 = 357 Barrels/Day

    EUR = IP / D = 357 BPD / 0.2% = 0.1785M Barrels

    These numbers look lower than the average of the whole Bakken, or IP = 365 BPD and EUR = 0.1825M Barrels.

    What is CLR's profitability outlook under these numbers? From CLR's Q3 revenue and production volume, I calculated that the unit price they fetched on the oil and gas was about $65/BOE.

    So a CLR well's expected EUR=0.1785M BOE would fetch a revenue of $65*0.1785M = $11.60M per well. But as discussed above, the per well capital spending was $11.65M. So CLR barely breaks even for the well capital spending. But the capital spending is not the only cost. We have not calculated the production and maintenance costs, the G&A costs. Thus, at the current oil price, CLR is not making any real profit in developing Bakken shale wells.

    Discussions and Investment Implications?

    So then, how could CLR manage to report positive profits for the quarters? Let me explain how it works out for them.

    Just like other shale oil and gas producers, CLR does not record well drilling capital spending as cost directly. Instead, they first record it as investment activity. The the capital cost is recognized in each quarter as depletion and armortization costs.

    I discovered that as producers tend to over-estimate the EURs and over-estimate the life span of shale wells, they end up armortizing the cost way below the fair amount of armortization they should calculated. Thus, as they under-estimate the costs, they end up over-estimate the profitability of the operations.

    But one thing they could not hide is that in quarters after quarters, the producers have consistently spend several times higher on capital spending, than the revenue they take in. Producers continue to borrow more and more on debts in order to continue their well drilling programs.

    Is a business profitable, if it continues to borrow more debts quarter after quarter, and it continue to spend several times more on capital spending, than the revenue it takes in? This is neither profitable, nor sustainable. I can see that when the banks get suspicious and stop lending money, then the shale industry will collapse.

    As I stated many times. The shale gas and oil adventure is deeply un-profitable. The "cheap natural gas replacing coal" is a pipe dream. Investors should bet their money on the rebound of the coal sector, not on the false promise of shale gas or shale oil.

    Full disclosure: I have no vested interest in CLR but I may consider a short position in the near future. I have heavy long positions in coal stocks like James River Coal (JRCC), Alpha Natural Resources (NYSE:ANR), Arch Coal (NYSE:ACI) and Peabody Energy (NYSE:BTU).

    Disclosure: I am long JRCC, ANR, ACI, BTU.

    Dec 10 5:39 AM | Link | 5 Comments
  • US Coal Supply And Demand Update On 11/15/2012

    It is time to look at latest EIA data and to provide an update on US coal supply and demand pictures.

    US Coal Production Curtailment Continues

    The US coal producers continue to curtail their productions as shown on the updated chart below:

    (click to enlarge)

    As of Nov. 10, 2012, the cumulative coal production curtailment was 95M tons, compared with the previous five-year averages.

    US Coal Prices Are Recovering

    According to CME Group, the CAPP coal future prices have rallied:

    (click to enlarge)

    (click to enlarge)

    Natural Gas Storage Glut is Gone

    Early in the year, every one was talking about the 1000 BCF glut in US natural gas storage. I predicted that the market will rebalance supply and demand, and that we will reach a normal storage peak in the fall. My prediction was vindicated. My prediction in April was for a storage peak at 3852 BCF, plus or minus 48 BCF.

    The US NG storage peaked last week at 3929 BCF. This week we saw a draw down of 18 BCF. My projection was off by only 29 BCF. The total injection for the injection season was 1560 BCF.

    The natural gas storage glut, due to over-production and a warm winter, was the reason NG prices and coal prices were suppressed. These bearish factors are now completely gone. The coal sector is poised for a big rally, as we enter a normal winter, and cut in gas well drilling activity will finally lead to production drop soon.

    What Happened Since Last Fall

    The EIA data provides a retrospect on the NG supply and demand since last fall:

    • From Dec. 2011 to Mar. 2012: Dry gas production was 625 BCF higher than last year; US consumption was 384 BCF lower than last year; net imports was lower by 230 BCF. This lead to a net storage glut built-up of 779 BCF of gas.
    • From Apr. 2012 to Aug. 2012: Dry gas production was 405 BCF higher than last year; US consumption was 811 BCF higher than last year; net imports was lower by 99 BCF. This lead to a net storage glut reduction of 505 BCF of gas.

    Things are looking bullish for both natural gas and coal here.

    Unfounded Fear that Obama Will Destroy the Coal Industry

    The market feared that as Obama was elected for a second term as US President, he will impose more EPA regulations to kill the US coal industry. I believe that fear is unfounded.

    • Obama clearly indicated that clean coal will be part of his energy policy. He is not banning coal. He just wants to have new technology to burn coal more cleanly.
    • The coal sector had been rally from 2009 to early 2011, during Obama's first three years in office. Clearly, the President's agendas had no impact on the supply and demand of coal.
    • Obama was NOT responsible for the factors that caused the depression in coal and NG prices in the last year. It was due to the reckless over-production of the NG producers, and an unusually warm winter. Obama did not tell NG producers how many wells they should drill, nor could he affect the weather.

    International Coal Demand Is Still Strong

    In the first 10 months of 2012, China imported 220M tons of coal. That exceeded 182.4M tons China imported in the full year of 2011.

    US exported 88.4M tons of coal in the first 8 months of 2012. My projection is that the whole year exportation will be 132.6M tons. That will be significantly higher than last year's 107M tons exported.

    India is facing a looming coal shortage. Actually India's electricity grid collapsed over the summer, causing a massive blackout through most part of the country. India needed to import a lot of coal fast. The delay of India's coal importation due to bureaucracy was the cause of its power shortage woe, and also cause why international coal price had been weak despite of strong demands from China and Europe. When India starts to import more, things will change.

    Investment Implications

    I believe the US coal mining sector remains one of the most depressed sector in the market place, and the best investment opportunity for the next 12 to 24 months. Every day I encounter a lot of articles proclaiming "coal is dead" every day. Coal is not dead. Coal is the fastest growing fossil fuel in the past ten years, globally.

    The discussion here pertains to interests in the following issues:

    • United States Natural Gas Fund (NYSEARCA:UNG)
    • Market Vector Coal ETF (NYSEARCA:KOL)
    • James River Coal Company (JRCC)
    • Alpha Natural Resources (NYSE:ANR)
    • Arch Coal Inc. (NYSE:ACI)
    • Peabody Energy Inc. (NYSE:BTU)

    Disclosure: I am long JRCC, ANR, ACI, BTU.

    Nov 16 11:02 AM | Link | 5 Comments
  • More Fracking Tales Of Consol Energy

    After I wrote about the fracking tale of Consol Energy (NYSE:CNX), I checked what they said about the productivity of their Marcellus shale wells in the past. It turned out they have been telling the fracking tales of absurdly high EURs (Estimated Ultimate Recovery) of their Marcellus shale wells for several years.

    Past Fracking Tales of CNX

    On July 29, 2010, as CNX reported its Q2, 2010 result, they said:

    The CONSOL Gas Division has seen excellent performance from its last five horizontal Marcellus Shale wells, including three brought on-line in the second quarter. The EURs, ranging from 5.5 to 9.9 Bcf, represent a middle - or "P-50" - case. The most recent wells, NV 22 CV and NV 22A CV were tied into line during the last week in May, so it is still very early in the lives of these wells. These EURs, while tentative, are much higher than the standard type curve that the company has been using. The results are even more impressive when one considers the length of the laterals, which averaged 2,200 feet. Preliminary EURs per thousand lateral feet in 2010 are averaging 3.3 Bcf. Although reported competitor data is scarce, this may be an industry record.

    CNX claimed a median EUR between 5.5 to 9.9 BCF per well. Median means half of their wells should perform above that level, and the other half perform below it.

    The Reality Versus The Fracking Tales

    How had these wells perform since then? Let's check out data from PA DEP to find out. The operator code of CNX is OGO-37312. The two wells CNX mentioned were:

    • 059-25145 (NV22CV)
    • 059-25242 (NV22ACV)

    I pulled the production records of all wells with that operator code. The cumulative productions of these wells are summarized as below:

    (click to enlarge)

    The average cumulative production of the 103 shale wells of CNX is only 0.58 BCF. The average history of production is 484 days. That's far below what CNX told us in 2010 and recently!

    This chart shows the distribution of cumulative well productions:

    (click to enlarge)

    Only one well, 059-25309, exceeded 2.0 BCF. Only five wells reached 1.50 BCF of cumulative production. Most of the wells produced less than 0.50 BCF. Such performances are far below the ridiculous claims of CNX of an average EUR of 5.5 to 9.9 BCF.

    Conclusion and Investment Implications

    As I have discussed in the past, natural gas (NYSEARCA:UNG) producers tend to use flawed data models to exaggerate EUR of their shale wells. When they claim their gas wells can produce 3 BCF, 5 BCF or 9 BCF, you should NOT take their claims at face value. You should always scrutinize the numbers and check the actual data. In reality, NG producers often make exaggerated projections of their wells that decline fast than expected and produce far below estimates.

    I am bullish on NG prices. But NG producers are not the right vehicle to invest in rising NG and coal prices. NG prices need to go many times higher than current level for producers to make a real profit. But current coal prices are right around the profitability threshold. Thus, coal mining stocks are much better investment opportunities.

    The discussion here is also relevant to the following:

    • Chesapeake Energy (NYSE:CHK)
    • EnCana Corp. (NYSE:ECA)
    • Cabot Oil and Gas (NYSE:COG)
    • Southwestern Energy Inc. (NYSE:SWN)
    • Sandridge Energy (NYSE:SD)
    • QEP Resources (NYSE:QEP)
    • Alpha Natural Resources (NYSE:ANR)
    • Arch Coal Inc. (NYSE:ACI)
    • James River Coal (JRCC)
    • Peabody Energy (NYSE:BTU)

    Disclosure: I am long ANR, ACI, JRCC, BTU.

    Oct 31 1:07 AM | Link | 1 Comment
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