Powder River Basin - Rockies Oil Ready To Bounce Back?

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Includes: CHK, DVN, EOG
by: BTU Analytics
Summary

Powder River Basin prices are nearing $17k/acre this year compared to prices less than $2k/acre only a year and a half ago.

30-day Max IP rates have been steadily improving in Campbell and Converse counties.

Powder River Basin oil production poised to rebound in 2017, growing ~35,000b/d by the end of 2018.

Source: Stock photo.

After a steep fall in production shortly following the price decline at the end of 2014, the Power River Basin is now poised to rebound. Strong interest and recent activity from Chesapeake Energy (NYSE: CHK), EOG Resources (NYSE: EOG), and Devon Energy (NYSE: DVN) have highlighted the Powder River Basin as a strong contender for one of the next "value" shale plays. Citing strong initial well results and stacked pay potential, announced operator plans are focusing more capital toward the Powder River Basin. Projected value of the play can already be seen in recent acreage valuations, with prices nearing $17k/acre this year compared to prices less than $2k/acre only a year and a half ago. As producers shift to adding rigs to the Powder River Basin instead of removing them like the past 2 years, let's look at what could drive growth moving forward.

For the three operators highlighted above, the most active areas in the Powder River Basin are Campbell and Converse counties, which contain the Turner and Parkman formations being recently targeted by these producers. The map above on the left shows the location of wells drilled in 2014-2016 for selected operators. While Devon has more widespread acreage across the two counties, EOG and Chesapeake have more concentrated activity. The map on the right breaks out these operators by formation. In Q1 2017 earnings reports, reported Powder River Basin breakeven prices were ranging from $35/bbl-$45/bbl for recent wells, making them very competitive to other prolific shale plays. BTU Analytics calculates breakeven prices for each major basin and operator and estimates average breakeven prices from $42/bbl to $65/bbl for the operators in this analysis based on a 5-yr Henry Hub average of $2.94/MMBtu. While these estimates are calculated marginally higher than what producers are saying, keep in mind that BTU's analysis factors in wells completed since 2015, while producers are basing results on current 2017 wells. Reduced drilling times and increased well productivity are helping drive improvements in breakeven economics in the basin.

The chart above shows average 30-day max IP rates by operator. In Campbell County, both Devon and EOG have seen large year-over-year improvements, and the well results reported in 2017 Q1 earnings indicate that the average IP rates will remain high as drilling continues. In Converse County, the results are less dramatic, although there is still a general increasing trend for each producer. On a producer level, these IP rates approach levels we saw in the Permian in 2015. The current data for 2016 doesn't show the same trend, but keep in mind that drilling activity was significantly lower and the well counts for many of the operators reflect that.

As producers pulled rigs out of the Powder River Basin in 2015, production fell sharply from its recent peak near 140 Mb/d. However, increasing IP rates and drilling activity could lead to nearly 35 Mb/d of growth by the end of 2018. In addition to the Powder River Basin, production in the DJ Basin is also increasing, causing total Rockies production to grow significantly in the next few years.

But growth from the Rockies faces competition as the Permian, SCOOP & STACK, and Bakken also increase production into a world market that is both oversupplied and facing significant challenges. Low prices shut down the Powder River before; will the new activity be able to survive volatility in the market?

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.