Hartstreet Oil: Permian Basin Production Analysis Comparison Of Concho And Occidental In Southern Reeves County

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Includes: APA, CDEV, COP, CPE, CVX, CWEI, CXO, FANG, HK, JAG, NBL, OXY, PE, USO, XOM
by: Michael Filloon

Summary

Southern Reeves and northern Pecos counties are prime targets for acquisitions in the Delaware Basin given the superior well economics.

There are multiple intervals untested and considerable de-risking to occur, which may increase acreage valuations considerably in the coming year.

It may be advantageous to focus on smaller pure players, as one or two huge wells could make these names a home run.

Concho Resources seems to be ahead of many operators with respect to well design.

Concho results provide an idea of possible future improvements in production from other Reeves operators.

We recently published a production analysis of wells near the acreage recently acquired by Noble Energy (NYSE:NBL) in Reeves County, Texas. Noble seemed highly motivated to increase its position, and was willing to pay almost $31,000/adjusted acre to get it. Clayton Williams (NASDAQ:CWEI) recently became a Delaware Basin pure play. This made for an easier sale. Our original analysis covered 212 wells. There were 17 operators that completed wells with at least two years of well life. Results were good, and are getting better. Well design continues to improve, and so do results. Oil prices may be heading higher, and with it the U.S. Oil ETF (NYSEARCA:USO). This provides added value to an already very good area. With much of US production growth coming from the Permian, southern Reeves operators will benefit.

Reeves and Pecos counties have as much upside anywhere in the U.S. This area has a very thick payzone. It has a combination of many intervals, with some untested. Most areas already have at least one exceptional interval, a payzone that can be developed at today's oil price. Bigger operators are motivated to take the chance on testing intervals, and one huge well could boost valuations of all holding leasehold nearby.

To provide additional clarity, we have broken down the production results by operator.

Name

Well Count

CUM Gas (MCF)

CUM Oil (BBL)

OXY USA WTP LP (NYSE:OXY)

72

7,548,237

5,708,539

COG OPERATING LLC (NYSE:CXO)

37

9,882,762

4,789,985

OXY USA INC.

19

1,813,180

1,625,167

THOMPSON, J. CLEO

14

4,792,593

2,331,952

PATRIOT RESOURCES, INC.

12

1,819,197

1,628,389

CENTENNIAL RESOURCE PROD (NASDAQ:CDEV)

11

2,607,557

1,009,181

ROSETTA RESOURCES (NASDAQ:ROSE)

8

2,237,934

795,618

PARSLEY ENERGY OPERATIONS (NYSE:PE)

7

925,050

475,207

PRIMEXX OPERATING CORPORATION

7

1,407,558

682,560

BRIGHAM RESOURCES OPERATING

6

1,643,668

887,248

WILLIAMS, CLAYTON ENERGY

6

1,107,492

795,378

JAGGED PEAK ENERGY LLC (NYSE:JAG)

4

708,073

716,827

Apache Corporation (NYSE:APA)

3

247,327

217,298

DIAMONDBACK E&P LLC (NASDAQ:FANG)

2

131,310

87,188

ARRIS OPERATING COMPANY LLC

1

493,279

82,474

ELK RIVER RESOURCES, LLC

1

246,786

218,139

MDC TEXAS OPERATOR LLC

1

843,243

193,400

SAMSON EXPLORATION, LLC

1

194,673

156,401

(Source: Welldatabase.com)

Occidental's 91 wells are seen in the map below.

(Source: Welldatabase.com)

The blue dots signify OXY locations. The bigger the dot, the larger the cumulative oil production.

(Source: Welldatabase.com)

The graph above provides the cumulative oil production over the first 6 months and the number of wells. As with any grouping of wells, there is a wide range of results. Two wells produced less than 10,000 BO and three over 110,000 BO.

(Source: Welldatabase.com)

The above graph provides the number of wells by lateral length. Sixty of the ninety-one locations were less than 5,500 feet. This is one of the main reasons production results have lagged.

(Source: Welldatabase.com)

Oil production numbers vary significantly. One OXY well eclipsed 250,000 BO in under 24 months. Several wells produced less than 50,000 BO. The average was 111,690 BO and 154,780 Mcf.

EUR: 111,692.73

111,692.73

Months: 23

23

Selling Price:

$50/Bbl.

Initial Capital Expense:

$7,000,000

Lease Operating Cost (monthly):

$48,562

Total

NRI

Total:

$5,584,636.45

$4,188,477

Recovered:

$5,584,636.45

$4,188,477

Total

NRI

Total:

($8,116,926.00)

($8,116,926.00)

Recovered:

($8,116,926.00)

($8,116,926.00)

Total

NRI

Total:

($2,532,289.55)

($3,928,449)

Recovered:

($2,532,289.55)

($3,928,449)

(Source: Welldatabase.com)

Even after we add natural gas revenues, there is still $3.5 million left to pay back D&C and LOE.

We see a much different picture when looking at Concho's well results.

(Source: Welldatabase.com)

It has fewer completions, but the dots are much larger. The best results are focused near the Ward County border. The map would indicate cumulative oil production to date is greater per well than for OXY. CXO has completed 37 locations in this data set.

(Source: Welldatabase.com)

The first six months of well life show an improvement from OXY locations. Two wells produced over 260,000 BO and four wells produced under 20,000 BO.

(Source: Welldatabase.com)

Roughly half of the wells have a lateral length below 6,500 feet. CXO has used longer laterals than OXY, which seems to be contributing to production differences.

(Source: Welldatabase.com)

CXO well results have been superior to OXY's. The average well in this area produced over 174,000 BO in the first 24 months. At least 12 wells have outperformed that number, and several more will surpass it in a short time. Three locations have already produced over 300,000 BO. Only one is under 50,000 BO. This is considerably better than the average of all wells, and is a greater improvement over OXY's locations.

EUR: 174,138.67

174,138.67

Months: 24

24

Selling Price:

$50/Bbl.

Initial Capital Expense:

$7,000,000

Lease Operating Cost (monthly):

$72,558

Total

NRI

Total:

$8,706,933.65

$6,503,200.24

Recovered:

$8,706,933.65

$6,503,200.24

Total

NRI

Total:

($8,741,392.00)

($8,741,392.00)

Recovered:

($8,741,392.00)

($8,741,392.00)

Total

NRI

Total:

($34,458.35)

($2,238,191.76)

Recovered:

($34,458.35)

($2,238,191.76)

(Source: Welldatabase.com)

After natural gas revenues are added (not considering NGLs), there is a little over $1.1 million to reach payback. Looking at CXO's results, before royalties these wells, on average, pay back in a little over 2 years. Not phenomenal results by any means, but very good at $50 oil and $3 natural gas. So why all of the excitement? This concerns upside. Operators realize the largest increase in valuations along with large acreage positions. Acreage valuations increase the most with big finds. We already have a couple of good producing intervals, and there is a good possibility others will follow.

(Source: Halcon)

Halcon's (NYSE:HK) slide shows the interest and prices willing to be paid. Callon (NYSE:CPE), Diamondback, Occidental, Noble, Silver Run (now Centennial) and Parsley are just a few names active. To us, the HK and FANG acquisitions in Pecos may be the most interesting. There has been much less traffic here. We expect these transactions to continue and consolidation to occur in a big way. Operators like Exxon (NYSE:XOM), Chevron (NYSE:CVX) and Conoco (NYSE:COP) are also present in the Delaware, although in other areas. Keep in mind, Loving and southern Lea counties are probably better. The problem is there is less upside, due to the unknown. We would suspect this area will provide more growth. With growth comes risk.

Disclaimer: This article is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. Well data is provided by WellDatabase. Accordingly, the publication of articles should not be construed by any consumer and/or prospective client as a solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the internet. This information is provided for guidance and information purposes only. This information is not intended to provide investment, tax, or legal advice. The information contained herein has been compiled from sources deemed reliable and it is accurate to the best of our knowledge and belief. However, I cannot guarantee its accuracy, completeness, and validity and cannot be held liable for any errors or omissions. All information contained herein should be independently verified and confirmed. Hartstreet LLC does not accept any liability for any loss or damage whatsoever caused in reliance upon such information. Readers are advised that the material contained herein should be used solely for informational purposes. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Welldatabase.com provided the data for this article. There may be a delay between upcoming articles because we are working on securing investments for Hartstreet's O&G Fund.

Disclosure: I am/we are long CXO, OXY, CDEV, APA, XOM, CVX, COP, PE, FANG, CPE.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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