Granite Wash Bites Back

The Granite Wash has seen an increased level of development over the last few years as operators find the high liquid hydrocarbon content of these plays to be more attractive than dry gas areas. This area is proving more difficult to develop than other unconventional plays as some exploration and production companies have recently reported disappointing or less productive well completions in the Granite Wash. (For a better understanding on how exploration and production can become a profitable part of your portfolio, check out Unearth Profits In Oil Exploration And Production.)

TUTORIAL: Commodities

The Players
Penn Virginia (NYSE:PVA) is working on the Granite Wash and several other formations as part of the company's strategy to shift capital spending away from natural gas and towards oil and liquids.

In 2011, Penn Virginia estimates that the company will spend approximately 77% of its budget on these types of plays. In 2007, the company spent 95% of its capital budget on natural gas development.

Penn Virginia said that wells recently completed into the Granite Wash were less productive than ones drilled earlier. The company attributed the problem to communication problems between wells related to "down spacing and fracturing."

This is not the first issue that Penn Virginia has reported in the course of its development of this play. In February 2011, the company ended development of its leasehold at the Powell prospect, citing high water saturation in wells drilled there. Penn Virginia also ended development at the East Sayre prospect due to unsatisfactory completion results.

Forest Oil (NYSE:FST) reported the production results of four wells completed into the Granite Wash during the second quarter of 2011. The wells had average 24-hour initial production rates of 9 million cubic feet of natural gas equivalents per day.

While these are excellent production rates, the company conceded during the earnings conference call that they were less productive than wells drilled into the Granite Wash last year, when production rates exceeded 20 million cubic feet of natural gas equivalents per day.

Forest Oil attributed the decrease to a number of factors, including drilling in different areas of its leasehold and the testing of new zones in 2011. The company's 2011 drilling was also impacted by infrastructure constraints.

Other exploration and production companies continue to see good results in the Granite Wash. Linn Energy (NYSE:LINE) has 19 operated wells producing from the Granite Wash and reported average initial production rates of 19 million cubic feet of natural gas equivalents per day.

SM Energy (NYSE:SM) also reported a well completed into the Granite Wash during the second quarter of 2011. The well produced 1,378 barrels of oil equivalent (BOE) per day during the first seven days of production. SM Energy has allocated $60 million in capital to the Granite Wash in 2011 and between $70 million and $75 million in 2012.

The Bottom Line
Investors should be careful about assigning full value to acreage in new unconventional resource plays where an industry development history is limited, as stock prices may react violently when wells come in below expectations. (To learn more about oil and gas, read Oil And Gas Industry Primer.)

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