Downspacing Allows Marathon Oil To Pump Out More Crude, A Win For Investors

| About: Marathon Oil (MRO)


Marathon is boosting its reserve base by targeting different horizons in the Eagle Ford and Bakken/Three-Forks plays.

Downspacing efforts in the Eagle Ford are pushing wells closer together, boosting Marathon's drilling inventory.

There is room for upside in its 40-acre Eagle Ford downspacing program through higher recovery rates.

Downspacing is working well in the Bakken/Three-Forks, and Marathon is pushing its efforts even further.

Kodiak Oil & Gas has gotten a pretty good idea of how much value downspacing creates.

Marathon Oil Corporation (NYSE:MRO) could uncover gargantuan amounts of recoverable hydrocarbons by opening up new intervals in the Eagle Ford and the Bakken/Three-Forks formations. Tighter downspacing efforts would allow Marathon to tap into both the Austin Chalk and the Eagle Ford or the Middle Bakken and the Three-Forks, without having to choose between the two and sacrifice potential output.

Downspacing allows E&P players to bring more wells online on the same amount of acreage, as long as the wells aren't "communicating" with each other, in other words interfering with production. Marathon Oil Corporation has been testing out 40-acre spacing on its Eagle Ford acreage, and so far eight of its wells targeting the oil and gas condensate portions of the play have posted strong production results.

160 to 80 to 40
Five of those wells targeted the oil heavy part of the play, with an average 24-hour IP rate of 1,840 BOE/d. The other three wells tapped into the gas condensate portion of the Eagle Ford, with an average initial production rate of 2,100 BOE/d.

While the IP rates were strong, pointing towards the efficacy of the program, there is room for improvement. The recovery rates of these wells ranged from 80% - 90% of the recovery rate on 80-acre spacing, with two wells coming very close to matching the recovery rate on 80-acre spacing. As Marathon continues testing out 40-acre spacing, it will be able to boost its recovery rate, just as it did in the past when it moved from 160-acre to 80-acre spacing.

Even if the recovery rate has room to grow, 24-hour IP rates around 2,000 BOE/d point towards Marathon's pilot project being very successful, which should allow it to book additional drilling locations in the future. Previous downspacing efforts grew Marathon's Eagle Ford drilling inventory from 900 to 2,300, as its 2P reserve base jumped from 469 million BOE to 1 billion BOE. Going forward, Marathon could unlock more than 1.7 billion BOE from its Eagle Ford position.

Downspacing elsewhere
In the Bakken/Three-Forks formation up in North Dakota and Montana, Marathon is also pushing forward with its downspacing efforts. At the Ostlund Spacing Unit, Marathon brought eight wells online with the 24-hour IP rates coming in at 1,500 BOE/d - 3,500 BOE/d. These results were backed by the 1,200 BOE/d - 2,600 BOE/d 24-hour IP rates at the Fettig Spacing Unit.

The success of those two units show that Marathon has been able to successfully utilize eight-well downspacing, which is why Marathon is planning on putting its wells even closer together. In July, Marathon spud its first 12-well spacing project, with six wells targeting the Middle Bakken and the other six targeting the first bench of the Three-Forks formation.

How downspacing generates value
Kodiak Oil & Gas Corp. (NYSE:KOG), which will soon merge with Whiting Petroleum Corp. (NYSE:WLL), has been able to get a good idea of how downspacing can maximize the value of their combined 855,000 net acres in the Bakken/Three-Forks play. Eight wells per drilling spacing unit at 1,000 feet spacing generates a net present value per DSU of $110 million - $115 million. The DSU yields an estimated ultimate recovery of 5.5 million - 6.5 million BOE and well costs come in at $8.7 million.

Bump that up to 12 wells per DSU with 800 feet spacing, and the NPV grows to $120 million - $150 million. The well costs go down to $8.5 million, and the EUR grows to 7 million - 8.5 million BOE per DSU. At the coveted 16 well per DSU at 600 feet spacing, the NPV hits $140 million - $170 million, well costs decline further to $8.2 million, and the EUR jumps to 9 million - 10.5 million BOE.

This means that going from eight wells to 12 per DSU substantially increases the amount of recoverable hydrocarbons while lowering costs, boosting profitability and the value of the acreage. If E&P operators could get downspacing to work effectively at 16 wells per DSU, then even more upside could be realized.

Marathon's downspacing efforts in the Bakken/Three-Forks has boosted its drilling inventory from 450 to 1,300 net locations, which should continue to grow. By tightening the spacing even closer and tapping deeper into the Three-Forks, Marathon should push that number even higher, while also growing its 2P reserve base from 630 million BOE to 800 million BOE and beyond.

Final thoughts
So far, Marathon Oil has been able to consistently bring more and more wells online in the same amount of space, proving its prowess in downspacing. As Marathon continues its downspacing efforts, it will be able to boost its reserve base, lower costs, and tap into other shale horizons. Tons of additional reserves could be uncovered from its exploration program in the Austin Chalk and the second bench of Three-Forks, which will be made possible by downspacing projects.

Marathon delineated 15,500 net acres of the Austin Chalk formation in its Eagle Ford position last quarter, and has plans to drill six wells tapping into the second bench of the Three-Forks through 2015. Due to its 30% production growth from its American shale assets, and the massive amount of potential yet to be discovered on its acreage is why I'm bullish on Marathon Oil. If you are interested in seeing the kind of potential that the Austin Chalk and the lower benches of the Three-Forks formations could yield, take a look at "Ask The Austin Chalk Or Three-Forks, Marathon's Oil Growth Story Is Only Just Beginning."

Disclosure: The author is long MRO. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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