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WPX Energy made recent headlines with its announcement to sell its remaining San Juan Basin assets for $700 million.  This agreement includes 105,000 net acres in the oily Gallup play and comes at a cost of $6,667 per net acre.  Although WPX Energy did not disclose the buyer, regulatory filings stated the buyer was Enduring Resources.  This high oil concentration acreage sold at a premium to recent deals in the gassier northern portion of the basin.  WPX Energy recently sold its gassier acreage of 134,000 acres for a total cost of $169 million.  In mid-2017, Hilcorp purchased 1.3 million net acres from ConocoPhillips in the basin for a total of $2.5 billion cash, which equates to around $1,923 per net acre.  This divestiture will allow WPX Energy to focus time, rigs, and capital on its remaining core assets in the Williston and Permian Basins.

Deal Summary and Conclusions

  • Overall, this deal appears to be a mix of positives and negatives for both parties.
  • $6,667 per net acre appears to be a high price relative to the Hilcorp-Conoco deal, but this acreage falls in the higher oil concentrated area of the play.
  • The San Juan Basin has attractive drilling and completion costs relative to other major onshore unconventional basin (WPX was spending around $4.1 million in D&C costs per well). Enduring will need to keep similar contracts as WPX to maximize earning potential in the area.
  • There is a trend for WPX of better oil EURs in the northwestern portion of the acreage, which eludes to some potential risk for the southern acreage. Further drilling will be needed to see if this is a result of proppant loading and longer laterals or if its geology related.
  • This deal successfully allowed WPX to unload, what it considered, non-core assets in order to focus on their Delaware and Williston Basin assets. This deal also provides substantial capital to invest in future drilling programs in its core areas while also paying down debt.  Analysis conducted by 1Derrick, a DrillingInfo company, stated that “a significant portion of this $700 million will go to reducing debt, as WPX holds a debt-capital ratio of 38%”.  The selling price does appear to be below combined PDP and PUD calculations at a 10 percent discount, however. PUD and PDP were calculated to be $973,625,649 in total.
  • Enduring spent more money than previous deals in the area on this acreage, but PDP and PUD values at current market prices show upside in the acreage. Potential upside is also due to the acreage’s high oil cut relative to previous deals.
  • Enduring Resources’ previous iterations have bought, developed and sold acreage for a profit, similar to many private equity backed companies. Although this acreage has upside from a pure drilling standpoint, there are clear challenges in this “prove up and sell” model working in this area in the current market.  Upside will have to be proven through completion and drilling practices that show new and maximized value.  At a one rig deployed assumption, it will take 9 years to drill out this acreage.
  • Breakeven in terms of recovering the $700 million investment will not occur with a 10% discount until year 9.6 assuming 7250 ft laterals, which is the stated planned lateral lengths according to WPX IR reports. It is difficult to imagine a private equity backed E&P would be willing to wait this long for a significant return on investment let alone breakeven on their initial investment. This makes me believe the goal is to drill, prove up, and then sell.
  • There does appear to be some economic upside in extended lateral lengths.  Drill times in the Gallop field are fairly quick relative to other horizontal plays, so extending laterals should come in relatively cheap compared to other areas. This is due to the Gallup being a sandstone and having relatively shallow depths comparatively speaking. The ultimate question will be; what are cost increases associated with longer laterals going to be relative to increased initial production, and how far beyond current maximum lateral lengths will a positive initial production trend be seen (current perforated interval lengths max out around 9,500 ft)?

 

Figure 1: Map containing active horizontal WPX wells in the San Juan Basin involved in this sale sized by oil EUR and colored by first production date.

Figure 1: Map containing active horizontal WPX wells in the San Juan Basin involved in this sale sized by oil EUR and colored by first production date.

 

 

Figure 2: Acreage map of WPX sold acreage

Figure 2: Acreage map of WPX sold acreage

 

Completions and Drilling Analysis

  • As you can see in Figure 3, peak BOE appears to positively correlate with horizontal length. WPX Energy appears to have come to a similar conclusion, as they have been extending their lateral lengths over time which appears to have contributed to a 94% increase in peak BOE over the last 5 years.  Interestingly, they appear to have pulled back on some of the longer lateral wells in the last year, which leaves potential drilling upside for Enduring.  They plan on drilling an average of 7,250 ft laterals according to their investor relations reports.
  • Looking at Figure 4, proppant concertation (proppant per foot) does not seem to correlate strongly with peak rates.  Even if there is a loose upward correlation, it appears minor, and proppant costs may outweigh the value of added peak rates.  WPX appears to have tried to increase proppant loads in recent years, so there may be a cost cutting opportunity for Enduring. This might be due to the Gallop field being a sandstone which treats differently than a shale as in most resource plays. WPX did not appear to utilize specialty sands and used mostly 20/40 mesh sizing. If enduring can secure long term sand contracts or own their own mine they might be able to see reduced costs.
Figure 3: Perforated interval vs peak BOE in WPX wells in the San Juan Basin colored by first production date.

Figure 3: Perforated interval vs peak BOE in WPX wells in the San Juan Basin colored by first production date.

 

Figure 4: Proppant per foot vs max initial production BOE

Figure 4: Proppant per foot vs max initial production BOE

 

Deal Analysis and Inputs

Figure 5: Inputs and assumptions for PDP and PUD calculations

Figure 5: Inputs and assumptions for PDP and PUD calculations

The rig schedule was calculated using DrillingInfo’s Rig Analytics dataset.  The days onsite for WPX wells, with the projected lateral lengths were determined to be slightly below 10 days.  This drill time was then applied to a drill schedule until all drilling locations were drilled.  All economics were run on a 10 percent discount rate.  This exercise assumes a start date of 7/1/2018.  These economic projections are 240 months into the future.

Results

Figure 6: Economic inputs and results.

Figure 6: Economic inputs and results.

  • Uses WPX horizontal wells.
  • Assumes all 105,000 acres are drilled out using 320 acre spacing.
  • 2 bcf and 258,340 bbl EUR.
  • 6 year payback period at 10% discount rate. In other words, the $700 million investment would be fully recuperated at a 10% discount rate at this time.
  • PDP and PUD values at a 10% discount were determined to be $411,354,991 and $562,270,658 respectively. This totals to $973,625,649 relative to the $700 million spent.  Economics were projected out for 20 years.
  • Projected EUR of 458,420 BOE (6:1) for new wells.

Final Notes

  • Although the total acreage PDP and PUD values are higher than the purchase price, it is difficult to imagine Enduring drilling out all locations over a 109 month time period. Typical private equity investments are liquidated in a 3 to 5 year timeframe, often shorter.  If the plan is to sell off assets in this timeframe, it appears there is a lot banking on drilling and completion tactics to increase acreage value and well return profiles.
  • Items to weigh: Long laterals account for an increase in peak rates, but proprietary cost for proppant and lateral drilling costs are needed to assess fully return profiles. This is extremely significant as it appears to be one of the major ways Enduring could add value to this acreage.
  • Although this is speculative, this may be a play that was bought on the assumption that oil prices are going higher for longer. The gamble may be to bet on higher prices in this 3-5 year timeframe with hopes that other operators get priced out of more competitive and densely populated basins and look elsewhere to operate.
  • Enduring will also assume WPX’s transportation commitments in addition to the Gallup assets.
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Ian Thomasset