A Question About Newfield

I have a royalty interest in 25-16N-9W. I have noticed that since Newfield purchased the two wells on that property that production has drastically decreased. Is it true that the company has retrofitted the wells to slow down production until oil prices rise?

It's my understanding that oil prices have come down in recent months, possibly because we are producing more oil and using less than anticipated Therefore, it would not be unusual for oil companies, including Newfield, to reduce their production until more favorable/profitable times.

Only Newfield Oil Co can tell you about "retrofitting" (not sure that is true) on the two wells on your property, but it's not likely they would ever discuss that with you.

Wes Estill

Thank you for responding.
I have considered buying some stock so that I could get information.

Ruth

I will take a quick look at the area and see if anything jumps out.

Regards
Jeff

Unfortunately, I don't think buying their stock would provided you additional information.

Their investor presentations are available online in the 'investor' portion of their website: http://ir.newfield.com/presentations

I had typed a detailed response, but apparently it got 'lost' when saving the reply.

In short, the production profiles through April 2017 (most recent dates I had handy) for both of the horizontal wells that cross the section - (the STANGLE 36-16-9 1H and the STANGLE 25-16-9 6H) - appear to reflect natural decline.

The 1H was drilled and completed by CHK and NFX took over in August 2016. The well's production is down from 2016, but nothing out of the ordinary and reflects natural decline.

The 6H never produced as strong as the 1H but has held relatively steady - this could be caused by a number of factors, including the well landing in a lower quality portion of the reservoir or an area of the reservoir that was depleted by the old vertical well (Oppel 25-A). It could also be NFX restricting the flow of the well to manage in an attempt to manage the reservoir pressure. However, the well's decline doesn't reflect any drastic changes since it was brought online - it should start to decline as it ages.

The good news is that you have an RI in a good area with pretty great rock. Although these wells may continue to decline, there is potential for additional horizontal wells to be drilled.

if I was to vague or if you have any other questions, just let me know.

regards

Jeff

Jeff,

Thank you so much for putting the time in to do that research. Your analysis was very informative. It's good to have a clearer idea of what's going on there.

Before Chesapeake sold this to Newfield they had applied to drill a third well there. I don't know where we are in this regard with Newfield.

Marcie

Marcie

sorry for the delay. The third well is still permitted, but that permit will probably expire soon if it hasn't already. Unfortunately the OCC website is down and I can't get to the filing. With that said, I would give my left kidney to own your acreage....(I never liked my left kidney anyway). Section 25 is in a great area and it will be down spaced at some point. I would anticipate multiple additional wells.

Hi Marcie,

I work as a drilling and completions engineer for a competitor of Newfield's in the area. I can assure you that there is zero chance that Newfield is intentionally restricting either well's production in hopes of saving their reserves for a higher realized price. Current oil futures contracts for the next five years (a great way of approximating market sentiments on future prices) are barely more than flat. The incremental cash flow from selling a barrel of oil at $57 dollars in 2020, for instance, vs $53 now, doesn't come close to making it worth it when you consider the very real time value of money.

In that acquisition, NFX paid a premium for the proven, existing production. They had to value those wells at the then-current production rates, and so to intentionally lower them would mean they lose money...potentially a lot of it.

More than likely they are just sitting on your section because it is HBP'd. When they have leases set to expire soon in other areas, why come back and drill another well in your section before they have to? Better for them to spend their capital budget getting all the leases they own in the area held by production, then they can come back and develop their HBP'd sections at their leisure.

But the other gentlemen's point about possible depletion is a real one. Not so much from a little vertical well, but from the horizontal. The big boys in that area (Continental, NFX, Devon, etc) are reeling a bit at the moment from the growing industry awareness that the subsequent wells in a given section usually have ultimate recoveries significantly less than the first ("parent"), if the parent was produced for perhaps more than 3 months before completing the subsequent ones. That is why you are seeing a glut of companies "density drilling" certain sections all at once, because if you do them all at once it doesn't cause nearly as many depletion and pressure issues during the stimulation and subsequent production. That is great if your section gets selected for full development, but if not, you may be waiting for a very long time before that happens. Keep in mind that each of these wells is $6.5MM-$7.5MM to drill, around $10MM-$11MM if it is a multi section well. That means, if NFX comes in and drills 8 more wells at once, they will be sinking over $50MM in one square mile of land in a matter of a couple months. Staggering to think about.

So, it's true that 25 of 16N-9W is awesome land. I'd love to have it. But unless you have access to NFX's rig schedule and know when they plan to come back, I wouldn't hold your breath. Could be a long, long time.

Dear Justin,

I can't thank you enough for your expert analysis of what's going on in my section. The sad part of this for me is that Chesapeake was developing the wells there before the sale to Newfield.

If it is true that the maximum oil production in a section happens when it is fully developed soon after the initial horizontal well is dug, does that not doom section 25?

I wonder if I bought a few shares of Newfield stock if they would divulge their plans to me about section25?

From what I can tell, Newfield did not release the initial production rate on that second well (the test well). The drilling was done by Chesapeake, but was not opened for months after Newfield bought it. That may explain why the production is so poor.

My situation is such that it may be best for me to sell my shares; I am a retired older woman with no heirs. I might take a world cruise! I only have a 1/8th interest, but I got $10,500 per acre on some acreage I sold last year. Do you think I could do better than that?

Marcie

Hey Marcie,

You bet. It's fun for me.

No, not doomed at all. My comments were really more just a caution. Some people see the first well come online and their eyes bug out...then they expect each subsequent well to be just like it. That's just not the case. But even 60% of an amazing well can still a good well.

Something odd is going on with the Stangl 25. The 1002A says the well was initially Temporarily Abandoned (left for future completion), but it is online now. NFX still hasn't updated the 1002A, though, to include stimulation details. I'll have to do some more digging. The 36 averaged 21,000 BO per month for the first 12 months, but by just month 5 the Stangl 25 had already declined to a 5-mo avg of 7,800 BO per month. Something is off there, I fully expect to see depletion, but not like that. Maybe NFX only completed part of the lateral, I don't know. I'll see what I can find out.

Don't waste your time buying any NFX stock, they will not share anything with you. Which isn't shady or anything, they have hundreds of millions of shares of stock outstanding...if they had to share info with shareholders, their competitors would simply buy a couple hundred bucks of their stock and then they'd know their plans. Newfield, and most other operators, usually won't even tell you their development plans if you are a full-blown working interest partner in a resource-play well. That's just the reality.

With no heirs, the decision to sell gets interesting. Prices in that area are super high right now, might not be a bad time to cash out. That acreage will eventually be worth a lot of money, but do you have 10-20 years to wait to get most of it? That is a question for you to decide.

The valuation you get will depend on the nature of your interest, how much you own, and what royalty rate you have. I assume you own leased minerals, not leasehold, is that correct? HBP'd minerals at a 1/8th royalty? The 1/8th royalty hurts on minerals, but you could still make a lot of money on it. Feel free to pm me if you want help evaluating different scenarios.

Justin

Good commentary. Are you truly seeing only 60% for child wells? I thought it was more on order of 80%. But overall, I think expectations are a bit overblown. There are some really good examples that demonstrate what happens when spacing is too tight throughout Kingfisher. Additionally, can you share your thoughts on how much the uptick from gen 3+ well completions. I’ve been working on my dataset in an attempt to see the trends between the more recent completions (which typically have focused on proppant and fluid volume) interacting with offset well interference.

And my reference to depletion in my original post was to natural depletion aka production decline over time.

The good news about Marcie’s acreage is that there is plenty of room in the meramec for a number of well bores and probably some woodford potential.

However ‘timing’ is something that many people fail to take into consideration when evaluating the value of thier minerals - the difference between having your land included in a density drilling project (where 5+ wells are drilled at once) in the near term (a year or less) versus some unknown time in the future dramatically impacts value. The well costs you reference are pretty spot on, and considering the vast swath of acreage NFX, DVN, CLR, etc have to drill, it maybe 5 or more years before down spacing occurs. Further if the acreage is HBP’d it doesn’t make sense for them to drill less than a fully downloaded pad - the economics just don’t favor single or double well development.

At the end of the day, she is sitting in a good spot. I’m almost finished with evaluating that area, but in general acreage not under a full density pilot is probably in the $10 -$15k and acre range depending on the number of current wells, andbtge RI and other terms in the lease. Time is the largest swing in value determination in that area as the aforementioned discussion of the unknown until you go from 1 or 2 wells to 8 or 10 results in a large range of present value.

Sorry for any typos, was eating lunch and typing on my iPhone…

Cheers and have a great day.

JPT had a great article lately looking at parent/child relationships in density drilling. Consensus seems to be a 20-40% reduction in EUR on subsequent wells…but of course that will vary by reservoir.

https://www.spe.org/en/jpt/jpt-article-detail/?art=3452

In the STACK, we are still pretty early on density testing, but you can look at some of Devon’s sections in 16N-9W and 10w where they did one well first, and came back a year or two later to do 7-8 more. Hard to accurately forecas EUR’s when these wells are still on a choke, but initial results diverge from the initial type curve considerably.

I’d still love to be in those two townships, though. Tremendous potential.

Thanks - I’ll pull it up. At Enercom in August, XEC’s CEO stated that their child wells are now out performing parent wells. But consideration MG most of the previous parents didn’t have boundary flow issues, it’s hard to believe that will be repeatable in the long term as the density wells are all boundary constrained from day 1 (the exterior wells maybe open to one side) in theory the child wells should have different production profiles from the parents and potential a different eur composition as the gor will change quicker than the inbound parent

Marcie,

I can assure you that owning a few or a lot of shares of Newfield's stock will not result in them divulging any information that they would otherwise divulge.

got home and was able to pull it up, yes read this article when it came out - seemed like it was a popular 'forward'.

Jeffrey,

The second well they drilled in Section 25 is producing a lot less than the first well initially produced.

Marcie

Jeffrey,

Don't you think stockholders would get more information on their drilling plans tan royalty interest owners?

Marcie

Unfortunately, no. Stock owners are entitled to 100% of the information contained in press releases, investor presentations, earnings calls, and SEC filings—nothing more.

Consider the insider trading exposure if that was common practice? And how could a company keep any new ideas secret if untold tens of millions of investors around the world had access to their proprietary information?

Buying stock will do nothing, unfortunately. You’d have better luck driving up on location where NFX was drilling a wel, feigning ignorance as a landowner, and just asking the company man (drilling foreman) if he knows where the rig is going next! I’ve done that before, field guys can be chattier than old ladies at bunko.

Justin,

That is a great idea! I wish I were down there but I live in TN. Do you know any drilling foremen who work for Newfield?

Marcie