The buy-out of Baytex will bring SM’s Divide County position to 97,000 net acres.
SM Energy Co.’s buyout of Baytex Energy Corp. in North Dakota further demonstrates Bakken and Three Forks producers’ confidence in what had been considered the play’s frontier—Divide County.
A neighbor to SM’s and Baytex’s leasehold in SM’s “Gooseneck” play area in central Divide County is Denver-based American Eagle Energy Corp. “The perception of Divide County had been that it is not as good a performer,” Tom Lantz, American Eagle chief operating officer, said in Oil and Gas Investor’s April 2014 cover story, “The Williston Basin.” “The reason is that the reservoir in our area is normally pressured, while it is over-pressured in the deeper part of the basin. That pressure is what drives those spectacular initial rates you are used to seeing there.”
But the Bakken and Three Forks are at a shallower depth—about 8,000 feet—in Divide County, rather than at about 11,000 feet in the center of the Williston Basin in McKenzie County to the south, so the cost of drilling is less, Lantz said. Also, because it is shallower and under less weight, less-expensive sand appears to work fine as proppant, rather than ceramic. Ultimate recovery is some 450,000 barrels of oil equivalent (BOE) per well landed in Three Forks and 350,000 BOE from wells landed in Bakken in American Eagle’s leasehold—less than the more than 600,000 BOE proved by wells in the basin’s center. But, Lantz said, American Eagle’s Divide County wells cost some $6 million rather than $9 million. “The economics are very good.”
Houston-based SM’s $330.5-million offer for Baytex’s North Dakota position involves 89, producing, operated wells, all in Divide County except for five in Williams County. SM will gain 61,000 net acres in the two counties, primarily in Divide and 70% held by production. Four additional Baytex wells are in confidential status and an additional five are being drilled, according to state records. Baytex has permits for five more wells not yet spud.
Calgary-based Baytex began drilling in North Dakota in October 2009. The deal will bring SM’s Bakken and Three Forks production from 16,500 barrels of oil equivalent a day to 19,700, 91% oil. The deal is to close in this quarter. SM will gain proved and probable reserves of 53.5 million BOE.
In the Gooseneck area, Baytex’s leasehold is in the middle and east of the SM position and is to bring SM’s exposure to this Three Forks play—with potential upside from successful completions in the overlying Bakken as well—to 97,000 net acres.
SM has been testing completions in Gooseneck with more sand per foot of horizontal wellbore. For example, on a roughly 10,000-foot lateral, SM had used some 192 pounds of sand per foot, the company reports; the new completion uses 265 pounds per foot. For the same length of lateral and when factoring in SM’s savings from a program toward reducing drilling days, the old well cost about $7 million; the new well, $6.2 million, it reports. Peak production from the new well is about 440 BOE a day; the old well, about 330. In short, the company reports, sand per foot has grown 38% and peak production has grown 33%.
Jay Ottoson, SM president and chief operating officer, said in the company’s earnings call this week, as transcribed by SeekingAlpha.com, that perceptions linger that Divide County is not meaningfully commercial for Three Forks and Bakken. “We hear this all the time,” he told securities analysts. “If you go back and look at just general industry data…in Divide County over a long period of time, there are a number of wells there that weren't great. A lot of shorter-lateral wells (were) drilled early on and a number of other operators have drilled wells that, frankly, we wouldn't be proud of.
“If you look at our results in Gooseneck, I think we stick out as an outstanding operator in that area and there are a number of good reasons for that, including the way we complete the wells and the way we operate them.”
Other Williston Basin operators outside the basin’s center are moving to more sand as well, he added. “As we continue to pump more sand, it appears the wells get better. Everybody is moving in that direction.”
SM will test yet more sand per foot, “probably almost twice” what it is currently using, he said. “Again, thickness does have something to do with that. The…intervals…here are a little thinner…We used to be concerned that if you frac these wells too much, that you'd get into the Bakken, which we thought might be wet. Our recent testing in the Bakken and log and core work would suggest that it's not going to produce high water cuts.
“So, in fact, we may be able to be more aggressive with our frac designs.”
Baytex is exiting North Dakota to fund its new Eagle Ford program, which it acquired this summer from Aurora Oil & Gas Ltd. in a C$2.8-billion, cash buyout, including debt assumption. It estimates its Bakken-sale value at C$111,600 per flowing BOE and C$20.09 per proved and probable BOE.
SM shares soared from a pre-announcement $77.03 to $81.92 the following day; they closed at $78.19 Friday as tickers tumbled, sending the Dow, for example, down 2.5% in three days. Meanwhile, Baytex shares tumbled from a pre-announcement close July 29 of $44.48 to close Friday at $41.88.
In addition to red tape on Wall Street this week, the September contract for West Texas Intermediate crude oil tumbled from a $103/barrel close on July 25 to $97.62 Friday.
SM Energy’s operated, producing, North Dakota well count of 223 will grow to some 310. Among its current wells, 128 were drilled beginning in January 2006, all in McKenzie and Divide counties and all horizontals completed in Bakken and/or Three Forks with one exception: a horizontal completed in Madison in 2006 that has produced 94,500 barrels to date. SM returned to that section in 2009 with another horizontal, completing it in Bakken; that well has produced 133,741 barrels to date.
–Nissa Darbonne, Author, The American Shales; Editor-at-Large, Oil and Gas Investor, OilandGasInvestor.com, Oil and Gas Investor This Week, A&D Watch, A-Dcenter.com, UGcenter.com. Contact Nissa at email@example.com.
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