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Posts from the ‘Sandridge Energy (SD)’ Category

Trying to understand Equal Energy’s position in the Mississippian Lime

I’ve spent a few hours this week trying to get a better idea of just how pervasive the Mississippian lime and chat formations are in Oklahoma, and to a lessor extent in Kansas. My investigation was precipitated by some comments by Equal at the Enercom conference a couple of weeks ago.  I will talk more about those comments at the end of the post, but first I want to go through what I have learned about the Mississippian.

I found investigating the Mississippian to be a tough slog; the information is sparse, some of the companies are private, and most of the others are large multi-play companies like Chesapeake and Range, and so they don’t divulge the well by well granularity that I am looking for.

Nevertheless I think I’ve developed a decent picture of the extents of the play and the well results so far.  What I will try to do below is step through the companies with acreage in the Mississippian and where that acreage lies, trying at the same time to put together a picture of the field and how prospective Equal’s land might be in relation to others.

I’ve limited this discussion to the economics of the Mississippian play.  I looked at expanding to geology and how it might change across the extents but I just haven’t been able to find enough information to develop a coherent analysis.  For now we will have to look at where the wells are being drilled and how successful are the results and draw conclusions from that.

Sandridge: King of the Mississippian

Any discussion about the Mississippian has to start with Sandridge.  They are the largest land holder, the largest producer, and I’m pretty sure they were the first mover in terms of trying out the hz multifracs on the formation.

Sandridge provides a good map of where they have been drilling horizontal Mississippian wells so far. I have highlighted where Equal’s land sits in yellow.

You can see from the little red and blue dots that most of the activity in the Mississippian has been centered around Northern Oklahoma.  Equal’s land is right on trend, if only slightly south.

Sandridge (the red dots) has been drilling most of their wells to the north of Equal, but still in the same counties, Alfalfa and Grant.    Sandridge provided a close-up of Grant, Alfalfa and Garfield counties in a later slide.  Again I have tried to deliniate Equal’s land with respect to Sandridge.  Based on the graph, and Equal’s own presentation that maps out their land holdings, it is clear that Sandridge surrounds Equal with their land package.

Valuing the Mississippian

During the Investor/Analyst Day on February 27th, Sandridge stepped through the valuation of the Mississippian.  Sandridge puts a value of $4,236 per acre on their Mississippian land.

The acreage value is implied from the joint ventures that Sandridge has completed with Repsol, Antinum, etc.  The resource NAV is more subjective; it is an estimate of the eventual NAV of the land once it has been fully developed and is producing oil.

Sandridge has been showing improved success as they drill more wells.  This is exactly what I would expect.  It happened in the Bakken, it has happened in Equal’s own area in the Lochend, it has happened at Swan Hills with the Beaverhill Lake.  As operators experiment and figure out what works and what doesn’t results improve. Below is an illustration of how the Sandridge 30 day average has improved over time, taken from their Credit Suisse presentation.

Sandridge put the following economics on the Mississippian in their Analyst Day Presentation.

I thought it would be an interesting exercise to see how these economics compared to other players in the Mississippian.   Below I have compiled a comparison of all the players with public data available regarding their Mississippian productivity estimates.

In the case of Range Resource, the company doesn’t provide a NPV estimate but did provide an ROI during one of their conference calls, so I have included that.

These estimates bring up the question of where some of these other companies are operating with respect to Equal.  Osage Exploration has a decent map of the Oklahoma acreage that can help deliniate that.  Its a bit cluttered but it helps to point out where some of the other companies have been drilling.  Again the area where Equal Energy owns acreage is highlighted in yellow.

Range Resources and Nemaha Ridge

If you look at the upper right of the graph you will see a purple arrow labeled Nemaha Ridge that is pointing to a yellow line going north to south.  Range Resources has built up a land position along this ridge, east of Equal’s land.

Range Resources had some interesting comments about the Mississippian on their Q3 and Q4 conference call (taken from SeekingAlpha).   First, here is what Range says about their acreage around Nemaha Ridge:

We are on the ridge. So you have that whole area that’s been defined and there’s different mats out there. So there’s — you can go west of the ridge, on the ridge or east of the ridge. It’s interesting — and I saw somebody put a map out to just look at historical vertical wells out there. If you look at where the best historical, vertical oil wells are, that’s where range’s acreage is. Somebody asked me offline, why do your wells — it’s early on and granted, can we hold it up? And as we drill, we will continue to see those results, but why are your wells look so good for the — why you’re getting the 485,000 barrels for 2,000 foot lateral, while other people are drilling 4,000 foot laterals and their reserves are in the same range? And if you look at the historical vertical wells or where the best wells are, that’s where are our acreage is in and around. So it’s necessarily east of the ridge or west of the ridge. It can be on the ridge or there’s — just like in all of these plays, where your acreage is really matter.

Next, here is what Range said about recoveries along Nemaha Ridge:

Particularly if you look at the oil plays, specifically like the Mississippian, we put out recovery factors of 4% to 9% of the oil in place. Do I expect ultimately it’ll be that? No, I would say it probably will be higher.

They also had the following to say about EUR:

I think in any of these places it’s really important on where you are. There’s always a core area and non-core areas. There’s better areas and poor areas. I would say looking at the results of our Mississippian wells even though it’s early, there’s only 8 wells, but the average results of 485,000 barrels per well… [up on nemaha ridge] you have a chat component to your production… The chat — when you get off structure, you tend to lose chat or you don’t have nearly as much. The porosity in the chat is 30% to 40%. The porosity in the carbonate is 3% to 5%.

When asked by one of the analysts during the Q4 conference call about the variability of results being seen in some areas of the play, Range had this to say:

I think in any of these places it’s really important on where you are. There’s always a core area and non-core areas. There’s better areas and poor areas. I would say looking at the results of our Mississippian wells even though it’s early, there’s only 8 wells, but the average results of 485,000 barrels per well is really great. It’s outstanding. So I feel comfortable that we’re in a good position. And we think really what drives that is the fact that where our acreage is located.

Chesapeake: Alfalfa and Woods Counties

Chesapeake owns a large parcel of land in the Mississippian. The company is not as forthcoming as Sandridge and the smaller players about where the acreage is or what their results have been. I don’t think this has any nefarious intent; they are simply a big company involved in many plays and they don’t have the space in their presentations to deliniate each play in detail.

According to their comments on the Q4 conference call, most of their drilling has been centered around Alfalfa and Woods county, which would mean just to the west of Equal.  This agrees with the Osage map above, which highlights an area in blue around Alfalfa county as being primarily CHK and SD.

Chesapeake has participated in about 70 wells in the Mississippian so far.  Of interest, in their fourth quarter conference call the company said that the Mississippian would be seeing 22 rigs this year, second only to the Eagleford.

We do expect our operated rig count will stay relatively level for the year at an average of approximately 161 rigs for the year. This is including 33 rigs in the Eagle Ford Shale; 22 in the Miss Lime play; 20 in the Cleveland and Tonkawa plays; 14 in the Utica Shale play; 13 in the Granite Wash plays; and 10 in the Permian Basin.

Devon and Osage Exploration: To the southeast

Devon Energy (DVN) has 210,000 net acres of exposure to the Mississippian oil play in Oklahoma and Kansas.  Devon bought land to the south east of where Equal owns land. Devon and Osage own land in very similar location.

Apparently, Devon Energy drilled twelve to fifteen vertical wells in the Mississippian oil play in 2011. Because they are a big company involved in multiple plays (much like Chesapeake) finding individual well data is difficult, even more difficult then Chesapeake. However the company did report during its Q4 conference call that it had drilled its first succesful horizontal well (again from SeekingAlpha):

We drilled our first vertical well in the second quarter of last year to gather data and have since drilled our first horizontal Mississippian producer, yielding very encouraging results. The Matthews 1H was brought online in the fourth quarter and achieved a 24-hour sustained IP rate of 960 barrels of oil equivalent per day, of which greater than 80% was oil. Through the first 30 days of production, the well averaged 590 barrels of oil equivalent a day.

Devon doesn’t describe where its land is.  In one of the companies presentations they point to land holdings in SE Oklahoma but mainly with the intent on drilling gassy Woodford shale wells.  There is no other mention by Devon of any Oklahoma acreage.  Luckily, Osage Exploration again provides an excellent map of where both they and Devon have a significant land base.

An extremely interesting point with respect to this map is that Equals Hunton lands are right in the middle of Logan and Lincoln counties, which are just to the south of the red and green blocks in the Osage map above.

Osage drilled one well at the end of December in Logan county and spudded another in mid-January.  There are no results yet, which would normally be somewhat discouraging, except that the stock price of Osage has gone rather ballistic over the last two months (up from 45 cents to 70 cents).  That and the the anecdotal Devon well leaves me wondering if Equal has more Mississippian acreage than they at first suspect?

Red Fork Energy: A Detailed Well Result

Red Fork energy is an Australian company that has been mentioned a number of times on the InvestorsHub Junior Energy Board.  According to a recent news release, they control 60,000 acres centered around the Nemaha Ridge (Payne, Kay and Pawnee counties) but extending as far west as Grant and Noble counties.  According to their presentation (which is from March 2011 btw) they expected to drill 11 wells in 2011.  I think that number ended up being more like two.  nevertheless, I stepped through the company news releases (here) to see how that drilling went.  They provided a rather detailed account of the company’s first well, releasing updates on almost a two-three week basis.

The company’s first well, in Pawnee county, was estimated by Schlumberger to contain OOIP of 58.4mmbo per section.  At a 5% recovery this would give 290,000bbl of oil per section, and presumably at 4 wells per section a little over 70,000bbl per well.  The company said they expected 3-5 Mcf of associated gas per barrel so that would put an overall hydrocarbon EUR of around 500,000boe per section or 125,000boe per well assuming 4 wells per section.  So pretty so-so numbers.

They fracked the well with 12 stages and provided information on the following 24 hour flow test:

The well produce 240 barrels of 28 degree API gravity oil, 240 Mcf of 1,300BTU gas, and 1,600 barrels of water by pumping via ESP and intermittant flow through the casing.

Don’t get too scared off by the water number.  I have read numbers as high as 3,000bbl/d of water from some wells.  It sounds like a lot, and is a lot, but it is being managed by Sandridge and others and isn’t indicative of any sort of watering out.

They follows that up with a news release on December 22nd and another on January 20th clarified that the well was producing at 300boe/d with about 80% of that being 38 degree API oil.

A second offsetting well (called Abunda 1-21H) is just finishing drilling in Pawnee.  The company is also in the process of drilling two wells in Noble County (McMurtry 1-22H and Blair 1-24H).

Equal Downplays the Mississippian

If you take in all the information from above and try to sort out some conclusions from it, I think its reasonable to say that the Mississippian is slowly being derisked, and it looks like its a productive and economic play.  Yet Equal seems to be really downplaying the potential.  If you listen to the presentation that Don Klapko gave at the recent Enercom conference it really focused on the negatives, in particular the risk of a 50 boe/d duster.

The slide in question is slide 12 from the presentation:

The essence of the slide is that Equal has gone through all the public data and  determined that the economics are just not up to par with the other plays the company has, at least when considered against the risks.

At the conference Don Klapko had the following to say about the Mississippian:

Our vision here is to liberate the value.  What we’ve done is taken all the public available data and mashed it together.  We are seeing is aout $3.5M capital expenditure, about 300,000 boe that kicks out at 25% rate of return… now I bet you guys are hearing a 75% rate of return on the mississippian play, well some wells will do that but you can also invest $3.5M and get a 50 boe/d well.

Now clearly part of the reason he is playing down the Mississippian is because of the need to justify the farmout.  Why would you farm it out if it was the the highest ROR?  So that makes sense.  The point is that the EUR estimates from other company’s are quite different than what Equal is estimating.

So I don’t know what to say.  I’m not sure where Equal’s public data is coming from and maybe they have access to more data than I have access to.  I can only go by what I have access to and the fairly rigorous analysis of what I have available to me does not paint the picture of a marginal play.   Its still early of course, but so far the results look pretty good, and appear to be improving as the engineers get a better handle on unlocking the play.

Below is a snapshot from another Sandridge presentation, providing estimates of 30 day production rates for the latest wells drilled in the Mississippian.

While there is indeed the odd 50 boe/d duster, there are far more 1,000boe/d + boomers.  Particularly of late.  5 of the last 12 wells have seen 30 day IP’s of over 800 boe/d.

There are differences between regions, so that is a risk.  Perhaps Equal knows, or suspects, that the land they own is lower quality.  But at the conference Equal called the actitivy around their area a “hot-bed” which doesn’t sound like they are on any fringe.  I can only speculate on the quality based on what is being drilled around them, and if you look at where Sandridge is drilling, it appears to be very near the heart of the play.

Nevertheless I do understand how quickly geology can change from section to section.   Structures can end suddenly, or thin out quickly.

Either Sandridge, Chesapeake, and Range (as well as the juniors) are hugely overestimating the resource or Equal is hugely underestimating it.   There’s no other way to take it.  The 3 former companies have all publically stated EUR’s that are 30-40% higher than Equal’s estimate.

Anyways it’s all conjecture until these wells produce a little longer and we get to see the real declines.  The bottomline, based on the information I have access to, is that the land itself should be worth at least $4,000 per acre.  That is based on other transactions.  The entire land base, 15,200 acres (I still can’t figure out if they lost the other 4,000 acres to lease expiration or what happened to it), should be worth $60M at this price.  A 50/50 JV should bring $30M to the company.

Unfortunately I suspect they are getting less than that.  At the Enercom conference Klapko said “this land tends to fetch huge dollars, up to $3,000 per acre”.  So I suspect that Equal is getting closer to this number, which would put a 50/50 JV at $22.5M net to Equal.

I suspect that this might be the reason they talked down the Mississippian at the conference.  Its too bad; I think they could do better.

A last word on Oklahoma Oil and Gas Information.

There is a wealth of information on oil and gas wells available at the website of the Oklahoma Corporation Commission.  They have a GIS database of well information, including monthly production volumes, for wells in Oklahoma.  Unfortunately finding existing Mississippian wells is nearly impossible.  Even when I got to the North of Alfalfa county, where there should be lots of wells drilled by Sandridge, I can’t find any of them.  If any one can point to me why this is (are these wells confidential or on some similar status?) or what I am doing wrong to not be able to see the wells, I would appreciate it.

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Letter 25: Tax Loss Buying

I am on vacation with limited computer access so this is going to be a short letter.

There was some good news for the oil stocks in my portfolio this week.

News that should help Equal

Equal Energy has not performed very well lately.  I don’t expect much from the stock until something is announced with the companies Mississippian lands in Oklahoma.  While we wait, Sandridge, the biggest landholder in the Mississippian, jv’d 363,000 acres of their land to Repsol this week for $1B.   That works out to $2,754/acre.

SandRidge will sell an approximate 25% non-operated working interest, or 250,000 net acres, in the Extension Mississippian play located in Western Kansas and an approximate 16% non-operated working interest, or 113,636 net acres, in its Original Mississippian play. The 363,636 net acres in total will be sold to Repsol for an aggregate transaction value of $1 Billion. Repsol will pay $250 million in cash at closing and the remainder in the form of a drilling carry. In addition to paying for its working interest share of development costs, Repsol will pay an amount equal to 200% of its working interest to fund a portion of SandRidge’s cost of development until the additional $750 million drilling carry obligation is satisfied.

Admittedly, this is a little on the low side compared to some of the earlier deals.  That is because this deal included 250,000 acres of the second Mississippian play that Sandridge is involved in.  The second play is newer and riskier.

The fact that Sandridge was able to get $2,750 per acre while only including 113,000 acres of the prime land (in Oklahoma the heart of the Mississippian is Grant, Alfalfa and Woods) provides another positive data point for Equal.

Equal has 20,000 acres of land in the heart of the Mississippian.  This is another deal that suggests that the land is worth around $70M.   At $4.50, the stock trades at an enterprise value of $300M and with a market capitalization of $150M.  It is clear that that the Mississippian land is not priced into the stock.

I bought some more Equal on Thursday at $4.50.  I believe the recent decline in the share price is simply tax loss selling.  I believe that the stock would be undervalued at $7/share.  At $4.50, its a little ridiculous.

Coastal Energy News

Coastal Energy has been the best performing stock for me over the last few months.  They have hit on well after well after well.  The string of success continued with the B-09 well news released on Tuesday.

“The Bua Ban North B-09 well encountered the largest pay zone we have seen to date in this field. We are particularly excited that we have encountered oil across five Miocene zones. This confirms the lateral extent of the deeper pay zones below our main producing reservoir. Following this successful result in the deeper zones, we plan to drill further appraisal wells to continue testing the 63.0 mmbbl of prospective resources defined in the RPS report ofNovember 15, 2011, which are incremental to the 67.0 mmbbl of 2P volumes defined in the report.”

What is most important about the result is that it begins to prove up the lower miocene sands.  First Energy noted the following:

The Bua Ban North B-09 well discovered 3-4 mmbbl in deeper Micocene sands which could open a new play for Coastal with an overall prize of 63 mmbbl prospective resources.

The Miocene sands that Coastal is drilling into are actually a number of layered sands as shown in the illustration below.  Up until the B-09 well, Coastal had been focusing on the upper two layers.  The B-09 explored the lower layers.  The RPS report distinguished between reserves and prospective resource in the Miocene.  While the news release did not say so specifically the above snippit implies that most if not all of the prospective resource is in the deeper sands.

There is an excellent summary of the Micoene sands that Coastal is drilling into that was posted by Oiljack on the Investorsvillage Coastal board.

Midway gets us Excited and then…

The moment I noticed that Midway Energy was halted I went out and bought shares in Second Wave.  I thought for sure that the halt was due to a takeover bid and that there would be a subsequent boost to the other Swan Hills players (Arcan and Second Wave).  Unfortunately, while a takeover bid may indeed be in the works, the clarification by Midway left the waters muddied.

Midway Energy Ltd. (“Midway” or the “Company”) announced today that it has become aware that information may have entered the market with respect to certain potential transactions. The Company has not entered into any definitive agreement with respect to these transactions and will issue a press release when and if a successful transaction has been negotiated.

Nothing like clarity.  Nevertheless the stock popped when it opened and Second Wave popped along with it.

I think I will hold onto Second Wave for a while; their latest update was mildly disappointing with a few of the recent wells producing at far less than the earlier more prolific Crescent Point JV wells.  However according to an Acumen Capital report, the lower production rates can be attributed to a failure of the packer equipment during the frac operations, while the 100% WI well drilled to the south (08-23-062-10W5) was limited to 100bbl/d by the surface pumping equipment.  I’m not sure I understand that second one entirely, I mean why would the company install insufficient surface pumping, but nevertheless I hold out some hope that the going forward results for SCS will improve on these numbers.  Meanwhile SCS does not appear to be as encumbered with infrastructure requirements as Arcan is in the short term, so  capital is going to be spent drilling wells.

Unfortunately, as seems to happen from time to time, the practice account I post here had my SCS order rejected because of a lack of margin, something that clearly isn’t the case (I don’t think RBC spends much time updating and debugging the practice accounts functionality).   I am reluctant to try to re-buy the stock now after the pop so for the moment I will not have my SCS position reflected unless it falls back to the $2.45 range that I bought it at in my actual accounts.

Gold Stocks

I am not sure if it was a smart thing to do but I added positions in a couple of gold stocks this week.  These should not be considered long term positions; they are simply me trying to take advantage of what I see as the severe underperformance of the stocks when compared to the bullion.  I added a position in Semafo at $6.40.  Semafo is a mid-tier producer that has generally held up well in the market but that got taken down to new lows of late.  I also added a position in Canaco.  Canaco has had a rather spectacular decline from over $5 a share to a low of a $1.  That is where I bought it.  The company has what looks to be a decent deposit in Tanzania.  Moreover, at $1 they have a market capitalization of $200M and with cash on hand of $115M.

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