One of the big questions in the investment community, according to Tim Rezvan, senior research analyst, Sterne Agee, is whether the Bakken is dead. After all, the Bakken play has seen a dramatic 51% plunge in rig count (down to 97 as of March 27), while operators are slashing capex and focusing on their core assets.
Though production is still growing, it won’t last forever. Curtailment could be felt as early as this summer. Assuming the Bakken rig count stays flat, production could roll over as early as July, with a 5% production decline from current volumes by the end of 2016, Gibson Scott, director, Energy Research at ITG Inc., told attendees at Hart Energy’s DUG Bakken conference April 1.
But, to paraphrase one of Monty Python’s most famous sketches, the Bakken’s not dead, it’s just resting. Despite the dismal prices (WTI was at $49.95 at press time), there is reason to be optimistic. The futures strip predicts $60/bbl WTI by the middle of 2016 and $70/bbl WTI by mid-2018.
“I think the important number to look at is the $70 threshold,” said Rezvan, who spoke on the same panel as Scott and Stratas Advisors upstream analyst Gabriel Martinez. “Conversations with operators suggest that will be a hurdle rate at which they would start hedging production, which is an important precursor to activity,” he said.
In addition, operators have been negotiating with well services companies on costs, and Rezvan said some already have 10% to 20% in price reductions in hand, with possible additional savings if the price of oil stays low. Companies also are lowering costs by refinancing their debt, he added. These methods could lead to a $5 to $10 reduction per barrel in breakeven costs this year.
The panelists pointed to the “coring up” trend currently happening in the play. “As we transition to 2015 to a period of reduced spending, activity is really going to be focused on the companies’ best rock and also on where companies have infrastructure in place to improve well-level economics, so we do expect breakevens to come down sharply in 2015,” Rezvan said.
Simply put, the Bakken core offers the highest recoveries and the lowest breakeven costs in the Williston Basin, Scott said.
“Along with mature regions like Elm Coulee and the Billings Nose, the extensional areas rank lowest in terms of per-well productivity,” he said. He added that the average well drilled in the extensional areas between 2012 and 2014 required a $70/bbl price to break even. Martinez pointed to the rig count. Of the 97 rigs still active in the basin, only six are running outside the four core counties (McKenzie, Williams, Dunn and Mountrail), he said.
Oasis in the Bakken
In a low-price commodity environment, Oasis Petroleum Inc. is looking to innovation and optimization to squeeze every dollar it can out of its processes, said Taylor Reid, COO and president of Oasis Petroleum, at the conference. “You’ve got to see things in different ways and find different ways to make your wells more economic,” he said.
As a pure-play Bakken E&P, Oasis currently holds more than 500,000 acres in the Williston Basin. The company has 400 operated spacing units, translating into more than 3,000 inventory locations. In 2015 Oasis also will rely on capital efficiency, seeking to maximize every dollar spent by employing advanced completion techniques such as high-intensity fracks, among others, Reid said. Slickwater frack results have shown wells that substantially outperformed type curves and results of conventional fracks. The company has seen increases in production ranging from 30% to 50%, varying by location in the basin.
“This is just a great indication of what high-intensity fracks can do for us,” Reid said. About 25% of the company’s inventory lies in the core of the basin in areas with high EURs and capital-efficient projects. Of the company’s total acreage, 70% lies on the west side of the basin, with the remaining 30% located on the east side. Oasis currently produces about 50,000 boe/d, with a resource base of about 270 MMboe. From a control perspective, more than 95% of the position is operated, with 70% average working interest in 2014. “In 2015 we expect that to be closer to 80% average working interest,” Reid noted. “And really importantly, it’s85% held by production. We’re not forced to move rigs around and drill wells to hold our land.”
Large contiguous areas of the company’s acreage—that range between 15,000 and 100,000 acres in size—position the company close to infrastructure and offer operating expense benefits. This, in turn, drives costs down, according to Reid. “We’ve got a great infrastructure position that we continue to build out that again helps with efficiency, driving down this operating expense. And we continue to build out both our well services and our midstream businesses, which again help us to be more efficient in our operations.”
In 2014 the company focused on high-density spacing unit drillouts, with 10 to 15 wells being drilled in a single spacing unit. In 2015 Oasis will continue this focus in addition to continuing to examine optimal spacing. The program grew production to more than 50,000 bbl/d in fourth-quarter 2014, a 27% growth rate.
Going hand in hand with the company’s focus on capital efficiency in 2015 will be its increased attention on its balance sheet, first by keeping spending within cash flow. “We moved from 16 rigs at the end of last year to five rigs currently, so we’ve got cash flow and capital in line,” Reid said.
Solid execution will play a large role in operations going into 2015, with Oasis seeking to deliver on every well. Remaining flexible and opportunistic also will prove a key aspect of the company’s strategic plan this year. “We put in place a hedge put that has more than $300 million in value,” Reid said. “We’re going to look for opportunistic ways to balance or manage our position from a financial standpoint going forward, which does include hedging.”
With total projected capex of more than $700 million, Oasis plans to complete 80 wells in 2015. From a production standpoint, the company anticipates keeping prduction flat up to as much as 7%. With a smaller capital program and less capital production coming on, base assets will command importance moving forward. “Managing downtime and keeping our wells all producing efficiently will be very important,” Reid said.
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