An analysis of oil and gas company plays in the Northern Midland basin -- a sub-basin of the prolific Permian basin -- indicates that few of the basin’s corporate sub-plays are currently economically viable even at current costs, according to analysis from IHS, a global source of critical information and insight.
In its IHS Northern Midland Basin Company Play Analysis, IHS estimated payback periods indicate that, owing to steep decline rates, only a handful of areas can recover half of completed well cost in six months or less under a US$50/bbl well-head price. And even at a $65/bbl well-head price, IHS said most areas require more than six months to recover half of well cost. After 12 months, nearly one-third of the company sub-plays modeled by IHS recover half of completed well costs.
“Steep production declines for Northern Midland basin operators greatly increase the economic relevance of maximizing a well’s longer-term recovery. This means production performance six to 12 months after coming online, rather than the typical operator emphasis on peak-month production rates that can often be misleading,” said Sven Del Pozzo, director, company and transaction research at IHS Energy, and author of the IHS Northern Midland Basin Co. Play Analysis.
“After six to 12 months, production is not typically high enough to recover the remainder of completed well costs within a time frame that would satisfy investors,” Del Pozzo said. “Therefore, today’s investment decisions depend more on commodity prices after six to 12 months, optimization of artificial lift, and generation of economies of scale.”
Since oil prices weakened, said Del Pozzo, across the play operators have largely ceased horizontal development of deeper targets, including the Wolfcamp C and D benches and the Cline Shale, in favor of shallower Wolfcamp benches that originally kicked off the play, while more recently testing the Spraberry.
Among Midland Basin operators, IHS said, Pioneer Natural Resources, RSP Permian Inc., and Diamondback Energy are the companies most exposed, in terms of acreage, to Midland County (including its border region with Ector County), where well performance is typically impressive in stacked pay zones.
“This is Pioneer’s most prolific county,” said Del Pozzo, “together with the border region of northwest Glasscock County, and its valuation is critical to our year-end 2014 appraised net worth (ANW). We estimate 60% of Pioneer’s acreage value, and one-third of the company’s total appraised worth, is located in the Northern Midland Basin.”
Image from IHS.