Bakken Update: Hess And SM Energy Not Seeing Cost Pressures

Includes: HES, SM
by: Michael Filloon

Hess (NYSE:HES) may be the biggest player in the Williston Basin, with 16 rigs and 900000 net acres in this play. Its first Williston Basin production was in 1957. In the third quarter of this year it produced on average 32000 Boe/d versus 25000 in the second quarter in the Bakken. This is a 28% increase in production. Currently, Hess is producing 39000 Boe/d and forecasts an increase to 60000 Boe/d in 2012. In 2015, Hess will reach 120000 Boe/d in the Williston Basin.

The company estimates a 38 stage frac long lateral will have costs of $10 million. Hess believes it will continue to lower this cost, and states sliding sleeves have shown cost reductions. 30-day IP rates in the Bakken on 38 stage long laterals, from a total of 35 wells, have averaged over 1000 Boe/d. Much of its drilling is occurring in non-core areas. Its acquisitions of American and Tracker are being worked and will be held by production in 2012. When this acreage is held by production it will begin to do more pad drilling, which will decrease costs. There are no plans to drill or test any of the lower benches of the Three Forks. Hess wants to focus on the upper Three Forks, and will assess other benches after much of this acreage is held by production. It will continue to work the middle Bakken and upper Three Forks. The company added a frac crew to help with its current drilled wells waiting on completion. This number is at 70, but Hess believes the majority of this can be completed in 6 to 9 months.

Hess continues to increase spending on U.S. unconventional plays. This is due to its low risk when compared to some international plays, such as Libya. Hess recently announced a buy into the Utica shale, and I would guess it would continue to look for other investments in the United States. When the rail comes on line, we could see significant increases in Hess' ability to receive a better price for Bakken oil. Currently, most of the Bakken oil is selling at a discount due to the back up of oil at Cushing. By using the rails, Hess should get a much better price, more consistent to that of Brent or Louisiana Light Sweet. Continental has mentioned better differentials by using the rail road. The Hess rail cars will have a capacity of 54000 Bo/d.

Hess plans to expand as needed, until it reaches a capacity of 150000 Bo/d. to give an idea of how its Bakken/Three Forks wells have produced, here are some of Hess' better wells. When looking at these results, keep in mind that Hess wells have lower production than many of its competitors, but these wells decline much slower -- in many cases creating long term numbers more like that of a Kodiak (NYSE:KOG) Koala well or a Whiting (NYSE:WLL) Sanish well. These wells are:

  1. TR Slette 18-1H 153-98: IP rate of 1213 Bo/d
  2. EN-Frandson-154-93-2116H-3: IP rate of 1325 Bo/d
  3. EN-Trinity-154-93-2833H-3: IP rate of 1125 Bo/d
  4. JCB 17-1H: IP rate of 1448 Bo/d
  5. EN-Dobrovolny A-155-94-1324H1: IP rate of 1073 Bo/d
  6. Knudson 15-20H: IP rate 1006 Bo/d
  7. Dahl 15-22H: IP rate of 1049 Bo/d
  8. Go-Vinger-156-98-2116H-1: IP rate of 1093 Bo/d
  9. Bergstrom 2-28H: IP rate of 1945 Bo/d
  10. Hickel 15-35H: IP rate of 1779 Bo/d
  11. Hodenfield 15-23H: IP rate 2042 Bo/d

This list is limited to wells in 2011 that had IP rates over 1000 Boe/d. The last three wells were not only the best, but these three were also the farthest north in Williams County. The second and third wells on the list are just west of the Sanish Field, and should have much better results than the others. Because these wells were so productive on a 24 hour IP basis, it would be a good idea to keep an eye on these fields in Hess' Goliath play. I would watch the development of its West Nesson play, as this is its play in Mckenzie County where Kodiak had a very good Three Forks well, Whiting had the best IP rate in the Bakken, and Continental (NYSE:CLR) found a commercial second bench to the Three Forks and the possibility of two (third and fourth) additional commercial benches.

SM Energy (NYSE:SM) reported a quarter over quarter increase in production from its Bakken acreage of 35%. Even with SM Energy's very good acreage in the Bakken, its flagship seems to be in the Eagle Ford. Like EOG Resources (NYSE:EOG), its Eagle Ford wells are better, and this is why it will spend three to four times more capital there in 2012. To be clear, it has acreage in the condensate window. These wells have historically been less costly to drill, and produce more total resource.

SM Energy is spending $8.5 to $9 million on wells in its Raven prospect. These wells are quite deep and the most expensive in SM's Bakken acreage. Its Divide County wells in the Gooseneck are running about $6 to $6.5 million. It is currently using more than 20 stages in Raven and continues to use sliding sleeves because it is saving about $1 million/well. Look for SM to move to 30 stages, and at this point we could see much better results. It signed a two year deal on a new rig, which increases this total to four. Both the Raven and Gooseneck have fairly large frac jobs, but the Gooseneck is much shallower, which is why costs are lower.

The company is preparing to drill a Three Forks well in Stark County, but says it has no plans of working any the lower benches at this time. SM Energy's operated wells have been much cheaper than its non-operated wells, as it continues to do a very good job of keeping costs in check. It has had some good McKenzie wells in 2011:

  1. Jorgenson 1X-30H: IP rate of 1099 Bo/d
  2. Johnsrud 1-1H: IP rate of 1016 Bo/d
  3. Jaynes 16-12H: IP rate of 1067 Bo/d

Much of this acreage is to the southeast of Whiting's Twin Valley well and is in the same field (Poe) as Kodiak's Koala wells. The Gooseneck seems to be getting IP rates between 400 and 500 Bo/d, which seems to be a good return on investment with costs this low. Look for these wells to begin producing better as it increases stages to its long laterals in Divide County.

There have been some cost increases stated by companies in the Bakken, but most realize a $10 million cost for a 30 plus stage long lateral. The more complex the completion, the higher the cost. Completion costs in the Bakken have been reported to stabilize in 2012 by several players. What an investor should concentrate on is longer term production. I usually quote a well's initial or 24 hour production, but what is more important is production over 90 days, or even better --180 days. I have done some of these comparisons in Bakken Update: Q3 Results. This article shows Kodiak wells versus that of Brigham's (BEXP), and gives a better long term picture of why Kodiak could the best stock of 2012. Remember, a well is only as good as the total amount of resource it produces, and an extra million spent on a completion can pay for itself quickly.

Disclosure: I am long KOG.

Additional disclosure: This is part of a series of overviews concerning Bakken/Three Forks players and how these have performed through the third quarter of 2011. This is not a buy recommendation.