Hartstreet Oil: Additional Possible Acquisitions In The Permian And 2 Names In Reeves County With Targets On Their Backs

|
Includes: APA, BBL, CDEV, CXO, DIG, DRIP, DUG, ERX, ERY, FANG, FENY, FXN, GUSH, IEO, IYE, MCF, OXY, PE, PXE, USO, VDE, XLE, XOP
by: Michael Filloon

Summary

There are several private operators in the Delaware Basin with land holdings in southern Reeves and Pecos counties that look ripe for purchase.

One stacked play has a number of untested intervals that make it very attractive to public companies, which could profit even at today's prices.

There are still a number of pure Bakken and Eagle Ford players looking for a Permian footprint, and we think this area will see the most activity.

As consolidation continues through all of the major core plays, it might be better to focus on E&P related ETFs.

Reeves and Pecos counties have seen significant interest in the Delaware Basin. A thick payzone and opportunities to downspace, make it one of the best areas in the US. There are many private operators willing to part with acreage. Large operators are interested in starting a position, or adding to leasehold. The well results have been good, and well designs are improving. Costs are also headed lower. Added infrastructure is improving economics. Increased Permian production has offset declines in the Bakken, Eagle Ford, and Niobrara. To maintain US production higher WTI prices are needed, which would increase the value of the US Oil ETF (NYSEARCA:USO). $60/bbl could increase US production by 400K bbls/d in 2017. This would offset some of the OPEC and non-OPEC cuts, but world oil inventories would still decline. The Delaware and Midland basins are the key to growth. This is a continuation of our overview of results in the southern Delaware. The chart below provides the well count and production from the main players in southern Reeves.

Name

Well Count

CUM Gas (NYSEMKT: MCF)

CUM Oil (NYSE: 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 (NASDAQ: CDEV)

11

2,607,557

1,009,181

ROSETTA RESOURCES OPER

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

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

Total

212

38,649,919

22,400,951

(Source: Welldatabase.com)

J. Cleo is a private operator in the southern Delaware. In October of 2016, it sold 35,000 net acres to Occidental (NYSE:OXY) for almost $40,000/adjusted acre. It is still active and had excellent results.

(Source: Welldatabase.com)

J. Cleo's oil production is shown above. It has a total of 14 wells over the time frame analyzed. There is a wide range of results, but only one well has produced less than 100,000 BO. Twelve wells have produced over 150,000 BO. That's quite good considering one well has produced for only nine months, two wells have produced for just a year. Although great results are important, all can be offset by one terrible result. Skeptics love to talk about the wells that did not work. Use that data to disprove US shale economics. Failures provide a learning curve and are few and far between. Great wells set the bar for future results. Averages are important. Huge wells drive numbers up and failures pull it down. The key is understanding if the poor wells can be done better, or if the interval or geology was the issue.

(Source: Welldatabase.com)

The above graph shows Cleo's focus on lateral length. In feet, it provides the number of locations it has completed and how far it is drilling. This may decrease its production per foot, but as stated earlier it is working.

(Source: Welldatabase.com)

The total number of days producing is shown above. Three of its fourteen wells produced between 500 and 550 days. Its important to note, the well producing between 400 and 450 days has garnered over 250,000 BO.

(Source: Welldatabase.com)

The type curve shown above is very good. As shown in green, oil production begins above 20,000 BO in the first 30 days of production.

EUR:

210,813.07

Months:

23

NRI (%):

75%

Selling Price:

$50/Bbl

Initial Capital Expense:

$7,000,000

Lease Operating Cost (monthly):

$91,658

Total

NRI

Total:

$10,540,653.52

$7,905,490.14

Recovered:

$10,540,653.52

$7,905,490.14

Total

NRI

Total:

($9,108,134.00)

($9,108,134.00)

Recovered:

($9,108,134.00)

($9,108,134.00)

Total

NRI

Total:

$1,432,519.52

($1,202,643.86)

Recovered:

$1,432,519.52

($1,202,643.86)

(Source: Welldatabase.com)

The oil economic analysis shows the average J. Cleo well with an average $1.2MM to payback. Once natural gas revenues (no NGLs) are figured, economics are positive at $227,726.14. The average EUR of 210,813 BO in just 23 months is nothing short of fantastic. J. Cleo's average oil production is almost double that of OXY. One would expect OXY's costs to be lower.

(Source: Welldatabase.com)

Patriot is another active name southern Reeves. It has twelve completions. The locations of its wells are in the map above.

(Source: Welldatabase.com)

These are some nice results. Two wells have breached 200,000 BO with another two above 150,000 BO. Only three wells have produced longer than 20 months and six longer than 15 months.

(Source: Welldatabase.com)

Lateral lengths have varied significantly, as shown above. Patriot has done 5 shorter laterals and 6 around 8,000 feet.

(Source: Welldatabase.com)

The total producing days of Patriot wells are shown above. Just two wells produced for less than a year. The bulk of wells produced from 350 to 600 days.

The average type curve is not as good as J. Cleo, but better than Concho. The difference from CXO is just 5,000 BO, but shows Patriot results are still excellent. J. Cleo seems to the outperformer.

EUR: 179,584.75

179,584.75

Months: 24

24

Selling Price:

$50

Initial Capital Expense:

$7,000,000

Lease Operating Cost (monthly):

$74,827

Total

NRI

Total:

$8,979,237.38

$6,734,428.04

Recovered:

$8,979,237.38

$6,734,428.04

Total

NRI

Total:

($8,795,848.00)

($8,795,848.00)

Recovered:

($8,795,848.00)

($8,795,848.00)

Total

NRI

Total:

$183,389.38

($2,061,419.96)

Recovered:

$183,389.38

($2,061,419.96)

(Source: Welldatabase.com)

The results of these two operators are very good. None of the results have been modeled, and all data is from average production results. There are several private operators in southern Reeves and Pecos counties. This acreage is highly sought after, and we expect several purchases in the coming months. Acreage values will continue to increase as new intervals are tested and further downspacing completed. While we think a name like Cleo Thompson is well suited to OXY, there are a host of names that could still enter the space. This includes Midland players, but more importantly Bakken and Eagle Ford pure players. In a time of low oil prices, some will look for new core leaseholds. Since the Delaware has lower breakevens than in east Texas and North Dakota, it would not be surprising to see a couple of big acquisitions. We expect further consolidation in all the best core plays. Although difficult to pin point which names will purchase private operators, it will be positive for ETFs like the SPDR S&P Oil & Gas Exploration and Production ETF (NYSEARCA:XOP) or to a lesser extent the Energy Select Sector SPDR ETF (NYSEARCA:XLE). If oil prices move higher as expected, the recent pullback in both may be a buying opportunity. Other ETFs with significant Permian exposure are:

  • Direxion Dly S&P Oil&Gs Ex&Prd Bl 3X ETF (NYSEARCA:GUSH)
  • Direxion Dly S&P Oil&Gs Ex&Prd Br 3X ETF (NYSEARCA:DRIP)
  • Direxion Daily Energy Bull 3X ETF (NYSEARCA:ERX)
  • Direxion Daily Energy Bear 3X ETF (NYSEARCA:ERY)
  • Vanguard Energy ETF (NYSEARCA:VDE)
  • ProShares Ultra Oil & Gas (NYSEARCA:DIG)
  • ProShares UltraShort Oil & Gas (NYSEARCA:DUG)
  • iShares US Energy (NYSEARCA:IYE)
  • iShares US Oil&Gas Explor&Prodtn (NYSEARCA:IEO)
  • PowerShares Dynamic Engy Explr&Prdtn ETF (NYSEARCA:PXE)
  • Fidelity MSCI Energy ETF (NYSEARCA:FENY)
  • First Trust Energy AlphaDEX ETF (NYSEARCA:FXN)

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 ERX, GUSH, APA, CDEV, PXD, CXO, FANG, OXY, PE.

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.

About this article:

Expand
Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here