Producing wells are one thing, but if the value driver is not the current production, the question is what is driving value. That is the first question to answer. So “speculators” or not, and the number of buyers is increasingly royalty companies, so much so that this month’s Oil & Gas Investor has a special supplemental magazine solely about non-operating mineral companies. They are buyers and accumulators for a longer-term outlook.
One interesting aspect of this is the argument of R. Hefner IV who said that when prices fell (which has a dramatic impact upon operators) it didn’t affect mineral prices nearly so much, which piqued his interest and why they are concentrating on accumulation of minerals rather than drilling the deep wells his daddy did.
When I rely upon production in producing wells, we are running decline curves. Our curves are more conservative than those touted by operators. We are seeing Fayetteville wells’ production decline faster than the operators project, especially in the mid years. So we end up with mostly 12–20 years of total life, instead of the 40 touted. In Oklahoma, I do an annual assessment for a charity on a well that claimed 250,000 BOE… The “oil” we predicted would last 4 years; it shut in in year 3 although we had projected gas to continue for 10 more years or so, but with the gas price so low, and earthquakes making injection cost skyrocket, apparently they hit a break-even point at a much higher volume than we used for a cutoff. There is room for 3 or so more wells on the property. I suspect they won’t be drilled for years, if not decades. Meanwhile, there are 3 shallow oil wells drilled in the 1980s that continue to produce marginal oil which brings in something. This year, my problem will be to estimate the value with this new reality.
So much of what I do is shallow wells that paid very little but the buyers are buying on the basis of the deep potential. I am reluctant to value the mineral merely on the basis of shallow production, especially in Oklahoma, SCOOPS and STACK because the driver of value is deep horizontal production even when held by production, because they are still integrating parties and browbeating any operator who tries to prevent deeper drilling unless they have a dead-to-rights lease. I have run into that in waterfloods where the operator does control any deeper drilling rights and no one is paying the “big bucks” even though production is modest from the waterflood.
Quick note: SEECO (SWN for some of you) sold in Arkansas, as did BHP. They had scheduled a total of 77 wells to be plugged and abandoned. Merit and Flywheel are trying to unravel that application until they can determine if refracturing will help. BUT these wells were supposed to be 40-year wells? It is barely 15 since the first was drilled. And we still have DUCs… which hint. These DUCs—like so many in Oklahoma and Texas, etc.—are really just DUDs. They won’t be economic to complete so long as natural gas is $3 or less. This is a fraud and the SEC should stop allowing companies to book reserves from DUCs. Doing so would, of course, bankrupt a slew of the players, which is exactly what needs to happen, bring sanity back to drilling, and allow prices to rise to economic levels. Exporting our LNG and oil is a short-term solution and flaring is a sin in my book. We will need those reserves sooner or later, or we risk a sudden dramatic rise in energy costs while we scramble some time in the future to find replacements outside of fossil fuels.