In my first article on PDC Energy (NASDAQ:PDCE), I highlighted how its bullish 2015 guidance, hedging program, and strong well economics would provide downside protection to investors. Next year, PDC Energy will spend 14% less yet will still grow its production base by 50.5%. Being able to generate a 33% return on its core Niobrara wells when crude is at $50 a barrel justifies the expansion. To keep enhancing its drilling program, PDC Energy is continuing to tighten up its operations.
In the oil and gas industry, downspacing refers to reducing the space between well laterals, allowing for more wells to be brought online in the same amount of space. Two years ago, PDC Energy was drilling four wells per 640 acre section. This yielded a drilling inventory just slightly north of 500 possible locations. Through downspacing efforts, PDC is now able to bring 16 wells online per section. This boosted PDC's drilling inventory in the Wattenberg to 2,800 locations, giving it a huge growth runway. Investors should keep in mind that over this time frame, PDC's acreage position in the Wattenberg fell to 97,000 net acres from 103,000 net acres as it sold off non-core acreage and expanded its core acreage.
To keep expanding the potential of its existing acreage, PDC is testing out 20 wells per section. Eight wells targeting the Middle Core part of the Niobrara are going to be completed at the Sunmarke project with 20-well equivalent spacing. As of now PDC should have almost completed all the frac stages for those wells if it hasn't already. Sometime in early 2015, PDC Energy and investors will get a good look at the production results from those wells to see if 20 wells per section is manageable. In order for the Sunmarke project to be a success, the wells have to not interfere with each other's production while yielding similar output levels compared to its "standard" wells.
PDC also has the 10-well Chesnut (section 28) downspacing project, which is testing out 20-well sections in its Middle Core region of the Wattenberg. Production is guided to start up in February 2015. These two projects will give a decent sample size to see if PDC will be able to move forward with 20-well sections. If PDC is able to, it will be able to record a bigger drilling inventory, which translates into more resource potential on its acreage.
Another way PDC is trying to maximize its potential is through extended laterals and tighter frac spacing.
Extending the lateral means PDC is increasing the length of the horizontal reach of its wells. By doing so, PDC Energy thinks it can increase the EUR, estimate ultimate recovery (how much the well will produce over its lifetime), of its new wells by 30% - 50%. PDC plans to extend the reach of some of its wells laterals to 6,500 feet versus the standard 4,200 feet. The ten wells at Chesnut Section 28 will also test out the extended lateral program, giving investors something else to look forward to in February.
Longer laterals yield wells that are much more profitable as the EUR per well jumps. Another major Wattenberg producer, Noble Energy (NYSE:NBL), has been very successful with longer laterals. Below is a graph showcasing how longer laterals translate into higher before-tax rate of return.
Source: Noble Energy Presentation
Other extended lateral projects include Chesnut Section 27 (close to Chesnut Section 28) and Churchill, both of which are being completed in the Middle Core and should yield results within a few months. Investors should see if these wells yield production curves that would indicate a huge jump in EUR. While it costs more to complete an extended lateral, the productivity increase substantially enhances drilling economics.
To further improve its returns, PDC Energy is testing out shorter frac spacing. Currently PDC Energy is completing a frac stage every 200 feet. By lowering that to 150 feet, PDC thinks it can increase its EUR per well by 10%. A combination of longer laterals and more frac stages will lead to more productive wells, enhancing PDC Energy's drilling economics.
Low oil prices have shaved ~50% off of PDC Energy's stock price over the past year, creating a great buying opportunity for investors looking to invest in the Wattenberg Field. Wells targeting the Codell and Niobrara formations can produce a 10% IRR even if the price of crude fell to ~$41 a barrel. By improving its operations, PDC Energy's strong drilling economics will only get better. Investors who want to read more about PDC Energy should take a look at Strong Wattenberg Growth Means Downside Protection With Plenty Of Upside.
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