The next variable to consider is location. Each play is unique in production and reserves. These plays also differ in types of production, and we can see this difference as location within the play is changed. If one was to be specific, breaking down each play by county would be prudent. Do not make the mistake of thinking the basin and formation are the same thing. The basin is a geological depression, which consists of rock that slopes down to a common center. A formation is a layer of rock that has like characteristics. Here are two of the best producing formations located in America's basins.
Williston Basin/Bakken and Three Forks Formations
Although this area is known for the middle Bakken formation, there may be more upside to the Three Forks. In some areas the Three Forks has up to four benches/layers. Well spacing is important as the middle Bakken generally supports four wells, but has seen up to six. The upper Three Forks has seen the same number.
Continental (NYSE:CLR) and Conocophillips (NYSE:COP) have both had successful wells in the second bench. These additional benches could significantly increase recoverable reserves. This area is known for its very high percentage of liquids production. EOG Resources (NYSE:EOG) reports liquids production as high as 98% in Mountrail County. This production is 92% oil/6% natural gas liquids/2% natural gas. This production changes to 78% oil/11% natural gas liquids/11% natural gas in northeast McKenzie County. Liquids increase to 94% in western Williams County with a resource breakdown of 87% oil/7% natural gas liquids/6% natural gas.
The middle Bakken reaches thickness of 90 feet in western Mountrail County, while the Three Forks reaches a total thickness of 270 feet in areas. Well costs for long lateral ranges from Continental's $7 million to Newfield's (NYSE:NFX) $11 million. Horizontal techniques differ greatly as EOG Resources completes short laterals that average approximately 4000 to 5000 feet in length. It uses 15 frac stages, and a 12/64 choke. The best well concerning initial production in the Williston Basin is Whiting's Tarpon Federal 21-4H. It has an IP rate of 4815 barrels of oil and 13163 Mcf of natural gas. It had a 90-day IP rate of 1260 barrels of oil.
SEE: Accounting For Differences In Oil And Gas Accounting
Western Gulf Basin/Eagle Ford
This area is known for the Eagle Ford, and should be as it may be the best unconventional play in the U.S. This play, like the Utica, has three windows. The northwest area of this formation is the oil window. From northwest to southeast, the play also has a condensate window followed by gas window. EOG Resources has stated the oil window is 88% liquids with 78% being oil.
SM Energy (NYSE:SM) has reported the condensate window in northern Webb County is 25% oil, 33% natural gas liquids and 42% natural gas. The gas window is mostly natural gas, with the southeastern portion 100% gas. The Eagle Ford is about 6000 feet below the surface in the oil window which gets progressively deeper to the southeast. It is found at approximately 12,000 feet in the gas window. This makes the gas window even less economic as well costs increase significantly.
Well spacing is very tight between 90 and 65 acres. The Eagle Ford reaches a max thickness of 300 feet. There have been consistent, very good well results in southeast Gonzales County. The geology shows this area to have some of the thickest shale in the Basin. Recently, EOG Resources has reported short laterals with IP rates of 3000+ Bo/d plus natural gas and natural gas liquids. For the entire Eagle Ford, it has EURs of 450,000 BOE.
Magnum Hunter (NYSE:MHR) is also in Gonzales County. EOG's results have been better, but Magnum has still produced lucrative completions. Initially, it used 13 to 16 stages, but this range has increased from 20 to 25. It has had three IP rates above 2000 Boe/d, with a high of 2289 Boe/d. Magnum has had four 30-day IP rates above 900 Boe/d, with a high of 1203 Boe/d. In one year, production will decrease to approximately 170 Boe/d. Magnum has Eagle Ford well costs at $9 million, EURs of 433 MBoe, and an average IP rate of 1250 Boe/d. Using these statistics, it will have IRR's of 38% at $85 oil and 97% at $115. Strip prices as of 4/9/12 produce IRRs of 54% in the liquids rich Eagle Ford, which is America's best unconventional play. Wattenberg Field in the Niobrara is second with 53%, and Mississippian Lime is third at 51%. There is a significant drop in plays following as the fourth best is Green River in the Uinta at 39%. Penn Virginia (NYSE:PVA) has well costs of $7.5 million in Gonzales County. It has EURs of 400+ MBoe, and production of 94% liquids with oil comprising of 88%. A well with an IP rate of 1000 Boe/d and 30-day IP rate of 775 Boe/d, will produce a BTAX PV-10 of $5 million. This assumes $85 oil and well costs of $7 million. Penn Virginia's BTAX PV-10 breakeven point is between $50 and $57/barrel of oil.
Marathon (NYSE:MRO) breaks down the Eagle Ford into four windows. The oil window is broken into two separate areas. To the northwest is the low GOR oil window, which produces an average 30-day IP rate of 385 Boe/d. This is 95% liquids and it has EURs of 445 MBoe. Using $85 oil, the low GOR window will have an average BFIT IRR of 22%. The next area to the southeast is the high GOR oil window. Its average 30-day IP rate is 675 Boe/d and EURs are 645 Boe/d. This window derives 77% of its production from liquids. Marathon's BFIT IRR is 43 to 50%. The condensate window has an average 30-day IP rate of 1650 Boe/d. EURs average 965 MBoe. Wells in this window produce 72% liquids. BFIT IRRs are over 100% in the condensate window. Last is the gas window which is not being pursued due to low gas pricing. For all four windows a 5000 foot lateral was used with well costs of $7.9 million.
SEE: 5 Biggest Risks Faced By Oil And Gas Companies
The Bottom Line
In summary, there are a large number of statistics important in identifying the value of oil and gas acreage. These are not difficult to calculate, but can differ a great deal from one play to the next. It is imperative to study the oil and gas producers in the area to get a feel of companies that are performing and not performing. The length of laterals and number of stages are just two variables that can affect initial production rates. When this is coupled with the amount of water and type of proppant, only an investor skilled in that particular play is going to understand why it had a good or bad result.
InsightsIn today's energy market, investors often try to distinguish between oil plays and natural gas plays, but the distinction is often moot -- most of today's wells produce a healthy amount of both.The ...
InvestingPrices for oil and natural gas are highly correlated. But investors should be aware of different factors affecting the prices of these commodities.
InvestingOil and gas investors need to focus on a different subset of ratios to analyze the growth and profitability of these companies.
InvestingInvestors looking into this industry are faced with a confusing amount of information. We explain the important concepts and terms.
InvestingOil and gas companies may look like a risky industry on the outside, but private equity investors have found reasons to regularly invest in these firms.
InvestingThe United States is the Saudi Arabia of natural gas, but natural gas stocks were a mixed bag last year.