(SOURCE: TheHydrocarbon.com) - Not until you actually open the bottle, can the party truly begin. And in the case of Canada's burgeoning Duvernay shale play, the cork is slowly being pulled, as industry players are waking up to the potential of Canada's answer to Texas' Eagle Ford.
The comparisons between the two shales are warranted: They have comparable thickness of pay zones; they both have similar porosities in the 3-12% range; and both have estimated reserves of well over 2 billion barrels. But the vintage of the Eagle Ford play in terms of exploration activity is four years older than the Duvernay.
If you're more familiar with the Eagle Ford, there's a reason, as it's had an explosion since the play was opened up and given time to breathe. Going back to late 2009, there were practically no rigs to be seen in the Eagle Ford, versus today where the latest rig count was pegged at 268 rigs (as of August 3, 2012).
Looking back at how the Eagle Ford was developed, one can compare the similarities to the Duvernay as it starts to move along a similar timeline. Right now there are a vast range of players in the region from behemoths like Encana (ECA:US) and Talisman (TLM:CA), down to juniors and micro-caps like Yoho Resources (YO:CA) and Mako Hydrocarbons (MKE:AU).
According to Macquarie Research, the Duvernay shales are "at the precipice of being a timeless unconventional resource play, characterized by the right geochemical, petrophysical, and mineralogical parameters."
In wine terms: it should have good flavour, it's aged right, so let's open a few more bottles.
THE DUVERNAY - INTRO
For those unfamiliar with the Duvernay, there's a reason for the unfamiliarity. This is still an emerging play with very little data available.
Industry has been fully aware of the Duvernay for quite some time, but now with enhanced horizontal drilling and completion techniques, economic recovery is possible. The Duvernay is the source rock for a vast majority of the hydrocarbon-rich pools that this industry was built upon.
What we do know is that it's large; spanning 100,000km2 (approx. 39,000 mi2)that borders along the foothills of the Alberta Rockies. That said, not all Duvernay is created equal.
The area with the most interest these days is a liquids-rich window, which BMO Nesbitt Burns has pegged to cover 7,500km2 (approx. 2,900 mi2). To put into perspective, that's approximately 30% larger than the Eagle Ford's wet gas window.
According to CIBC Wood Gundy (in a June 14, 2012 report), this liquids-rich resource could be as large as 2 to 5 billion barrels of liquids, and an enormous 150 trillion cubic feet of gas. Compare that to the Eagle Ford's estimated 3 billion barrels and potential output of 420,000 barrels a day, and you can smell the aroma of sweet potential.
WHAT'S THE CATCH?
So we knew it's huge. It's huger than huge. The cellar is absolutely full, and the potential is there, but the corkscrews have been relatively silent. Drilling activity has been slow to get moving.
Compared to the Eagle Ford that has corks popping in rapidly increasing amounts, the Duvernay is quiet with only a fraction of the activity of its Texan cousin.
The problem is costs. The Duvernay is deep, and it ain't cheap. Costs for drilling are in the $5-8 million range, but completion work can bulk on up to an additional $5-7 million, which tends to scare away the cheapskates.
Add in the crucial factor of soaring land prices, and the Duvernay becomes even more restrictive. There have been over 900 Duvernay parcels sold over the last two years alone, which brought in over $750 million in June 2011 alone to the Alberta government. Overall, close to $2 billion has been spent on this land in total since companies started to zero in.
These last two years have seen around 800,000 hectares (315,000 mi2) snapped up at an average price of $2,500/hectare (or $1,000/acre) and about three times the average prices seen elsewhere in the province).
What have also been alarming are the parcels with extreme outlier values as was the case for Sonde Resources that cashed in $75 million for a 24,000 acre (9,712 hectare) Duvernay package that was undeveloped with no reserves on the books; this translates to $3,125/acre!
So with top dollar demands coming from land auctions, the drill bit, and the stimulation "frac" crews, the economics of the play are going to need to be substantial to make it work. Producers are going to need to hit liquid contents of over 60 barrels per million cubic feet of gas to keep up their excitement.
In a mid 2011 report called "Do the Dew-vernay," Macquarie Equities Research aptly labeled the Duvernay as "Big liquids. Big costs. Big payoff."
Despite an inability to calculate a type curve with high amounts of certainty (due to a lack of available data as of yet), the Macquarie report calculated what the group believes to be the potential for an IP rate of 4.2mmcf/d and a liquids yield of 75bbl/mmcf, with an average life expectancy that could yield ~ 940 mboe/well (30% of which is liquids). Certain of the big players are already touting 200 bbl/mmcf liquids from early test results, which would make this Canadian shale play, truly world class.
If Macquarie is correct in their assumptions, then the Duvernay will indeed pay itself off. So, it'll be up to those with the capital to help prove that this is indeed the time to pull the cork on what could be a great resource play.
THE WINE LIST - DUVERNAY PLAYERS
Given the nature of the play, the large companies would be the holders of the best information on the Duvernay, and they ain't sharing that with a lot of people. They don't need to, since a 12 month "confidential period" is granted to them by the regulators.
Within the Duvernay's liquids-rich fairway, there are plenty of players in the mix, from behemoths like Encana, ConocoPhillips and Talisman, all the way down to juniors and micro-caps, such as Yoho Resources and Mako Hydrocarbons.
Here is a list of some of the notables that cross the spectrum of market cap and activity levels:
SMALL CAP HIGHLIGHT
Broadly unknown to North American investors due to its Australian listing, the Mako team is a dark horse in the Duvernay. With 62 net sections within the wet gas/oil window on its Willesden Green/Pembina package, the company could be the largest Duvernay exposed company by market cap, making it one of the most affordable entry points for investors looking at the Duvernay. And they've secured at least one private partner so far that's going to help them get the drill bits turning, so they won't be stagnant this year, despite their small size.
Mako's advantage grows with every well that's drilled around them, and given their location in the fairway, they're going to be getting a lot of help. According to Paul Griese, President and Managing Director of Mako, "The play is coming towards us through the activities of others."
Near Mako's lands are indeed some significant players, with Encana drilling 6 wells (4 vert. tests, 2 horiz.), ConocoPhillips and Sinopec/Daylight each drilling 3 (2 vert. tests, 1 horizontal), and Talisman and Sirius Energy each drilling 2 vertical test wells. With 23 wells licensed and/or drilled at July 31 2012 in Mako's fairway, the activity continues to ramp up with Talisman licensing an additional 2 wells in early August 2012, just next door to Mako's acreage.
"The companies in our neighbourhood typically have billions attached to them, if you look at their market cap," adds Griese. "They've spent a great deal of money securing the lands around us."
During the heyday of the land grabbing, some sections of land were fetching upwards of $1-3 million (which got progressively cheaper the further north they went). Today, the offers from potential partners are no doubt set to swirl. Mako's team has likened their position to being a lot like a minnow in a shark tank. They have to react quickly to the offers put before them, without signing away too much of their net interest.
Looking over their drilling program for the upcoming few years, Mako has put its Rock Creek properties at the top of its priority list, as they're far more affordable to drill. This isn't to say that the company doesn't see the Duvernay as its pride and joy, it does. What the team is doing for now is keeping its Duvernay position in play with some testing (their first vertical test well is scheduled to spud late 2012 by the private partner), and patiently waiting for the surrounding companies to more clearly define the economics and bring risk down to their level.
Expectations on their lease production capabilities are very high over the next two years. Production is set to begin on their Rock Creek properties in early 2013, and then it's estimated that they'll be drawing production from the Duvernay by mid-2013. From the company's latest presentation, their March 2014 target is between 10,000 - 12,000 boe/d of lease production (51% oil and liquids), of which some portion will be attributable to their working interest, depending on the type of partner(s) they can secure [NOTE: This production curve has two material assumptions; 1) Timeline of drilling and 2) 100% Working Interest].
HIGH YIELD to MID CAP HIGHLIGHT
With over 742 sections of land (300 sections with 20+meters of net Duvernay pay), Athabasca has the largest land position in the Duvernay. It's worth noting that the company was far ahead of the rush when it secured this position, nabbing 475,000 net acres at an average price of ~C$100/acre.
In terms of recent activity, the company drilled 10 wells during Q2, 2012, completing only 2 (not all of which were Duvernay). Athabasca reported that re-testing on its Kaybob Duvernay well stabilized at a rate of 800 boe/d (containing 650bbl/d of 43 degree API oil). These results were significantly higher than initially witnessed (a 70% increase in oil rate, and 10x increase in flowing pressure).
This understandably pleased Athabasca President and CEO, Sveinung Svarte who said in a July update that, "The Duvernay well production re-test results are very strong, and confirm Athabasca's light oil strategy targeting the liquids-rich portion of the Western Canadian sedimentary basin."
Today, Athabasca has more than 7,000 boe/d production from its Light Oil Division (50% oil and NGLs) waiting behind pipe, as the company works towards completion of its own wholly-owned treating facilities.
For newcomers wanting to follow the play, Athabasca presents a blessing of information, as they have drilling activity, land, and an open nature to sharing their findings with the investment world.
Other notables in this market cap range: Sinopec-Daylight Energy (private), Celtic Exploration (CLT:CA), Vero Energy (VRO:CA), Chinook Energy (CKE:CA), Bellatrix Exploration (BXE:CA), and Angle Energy (NGL:CA)
LARGE CAP HIGHLIGHT
With the rough ride that Encana has been on with its share price over the last few years, the Duvernay has the potential to wake the sleeping giant's production totals. Though fellow major Talisman has more cash to throw around, Encana has plenty of open space, with what it believes to be more than half of the land available in the liquids window. In total, Encana has approximately 570 net sections (second only to Athabasca), which narrowly edges out Talisman, which is close behind with 563.
With the most rigs on the ground (10 wells planned for 2012), Encana stands to be the leader in this pool. The company has identified 1,000 - 1,600 net well locations, and expects well spacing between 160-330 acres. In their latest presentation, Encana estimates that it has 30 Tcf (a fifth of the 150 Tcf estimate for the total pool) and 4 billion barrels PIIP on its lands.
But even with its size privilege, Encana's costs per well are still up there in the $13-15 million range. The more they drill, the more that price tag will likely go down.
Unlike the juniors on this list that will be more forthcoming with their results, Encana will play its cards close to its chest. Most of the wells drilled this year will be confidential until Q4 2012, Q1 2013.
Other notables in this market cap range: Talisman (TLM:CA), Husky Energy (HSE:CA), Chevron (CVE:US), ConocoPhillips, and possibly Shell (RDS:US) (rumoured to have acquired 46.5 net sections from Petrobakken in April of 2012).
G. Joel Chury
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.