Future Of The Piceance

| About: The United (USO)

Summary

Early into 2016, Piceance Energy acquired assets from OXY, and Terra Energy Partners purchased Piceance acreage and producing wells from WPX.

Breakeven analysis shows that at today's oil strip pricing, a $1.0M D&C cost for an average Piceance well would require wellhead gas prices of nearly $4/Mcf.

Public independent operators aren't likely to refocus capital to their Piceance acreage anytime soon, but a strong showing from focused private operators could work to reverse the Piceance's decline.

According to the USGS, the Piceance Basin is one of the largest gas resources in the country in estimated reserve volume, second only to the Marcellus. But despite the sizeable potential recovery available in Western Colorado, the Piceance has been in a steady and steep decline since 2010. Wells brought online have fallen from 1,700 per year in 2010 to only 200 wells for 2016. Weak gas prices in 2011 kicked off the decline, but even 2013 and 2014 prices in the $3.50/Mcf-$4.00/Mcf range weren't enough to reverse the downward trend. The Piceance saw further activity declines in 2014 as prices fell again and recent activity is nothing to write home about. As we begin a new year with a much improved fundamental outlook for producers, will anything change in the Piceance?

The chart above shows the annual number of wells brought online in the Piceance Basin. The decreasing trend has caused production to fall from a 2014 average of 2.02 Bcf/d to below 1.5 Bcf for 2016. While some horizontal wells have been drilled, this older and more mature gas play is almost entirely composed of vertical wells.

But there are more issues than just a slowing of activity due to low commodity prices. Over the last few years, there has been a steady abandonment by public independent operators in the basin. WPX Energy (NYSE: WPX), Encana Corp (NYSE: ECA), Bill Barrett (NYSE: BBG), Occidental Petroleum (NYSE: OXY), and Exxon Mobil (NYSE: XOM) were all top operators in the basin at one point. But one by one, these companies have reduced activity dramatically and many exited the play completely in favor of other opportunities within their portfolios. This shift allowed for private companies to have a more significant presence in the basin. Early into 2016, Piceance Energy acquired assets from OXY, and Terra Energy Partners purchased Piceance acreage and producing wells from WPX. With private companies now responsible for most of the activity in the Piceance, what does that mean for the future of the basin? Well, it still comes down to breakeven economics.

The figure above highlights the average breakeven prices required for a standard well in the Piceance. Breakeven prices were calculated using BTU Analytics' sublocation type curves for the Piceance, an average gas IP rate of ~1,000 Mcf/d, and a selected range of D&C costs to highlight commodity price sensitivity.

The breakeven chart shows that at today's oil strip pricing, a $1.0M D&C cost for an average Piceance well would require wellhead gas prices of nearly $4/Mcf. In 2014, WPX reported well prices of around $1.2M and some of the private operators are now achieving $1.0M wells in 2016, but significantly further reductions in D&C costs seem unlikely as we expect service costs in general to begin rising in the US over the next several years. At today's commodity prices, certain areas of the Piceance will work, but in general, the breakeven pricing above shows that higher prices or further cost reductions are needed to incentivize meaningful production.

So what is the upside case? As producers increasingly target the Mancos and Niobrara shale within the area, we could see average IP rates begin to rise after being constant for the past three years. Laramie Energy has reported vertical wells within those zones with IP rates much higher than used in the breakevens above. While WPX and Encana were more active, both reported numerous wells with IP rates above 5 MMcf/d. In addition, multiple wells and zones are now being targeted from a single pad, decreasing costs and increasing productivity. Horizontal plays are also being explored, opening up additional potential and stacked play opportunities. Public independent operators aren't likely to refocus capital to their Piceance acreage anytime soon, but a strong showing from focused private operators could work to reverse the Piceance's decline. For more information on BTU's view of the US energy market in 2017, join us at our What Lies Ahead Conference in February.

Disclosure: I/we 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. I have no business relationship with any company whose stock is mentioned in this article.

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