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Shale Plays: Greater Yield And Lower Costs

Posted: Nov 09, 2009 10:23 AM by Eric Fox

Tickers in this Article: CXPO, BEXP, NFX, WLL, DVN, SWN

Third-quarter earnings reports from the exploration and production industry show that shale plays keep getting better and better, as the industry learns how to develop these immense resource bases more efficiently and less expensively. The companies that are the best at doing so will prosper during this period of low natural gas prices.

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Anyone who thinks that the shale plays are getting a little stale with age should think again, as two record setting well completions were reported during earnings season.

Haynesville High
Devon Energy (NYSE:DVN) reported a well completion in the Haynesville Shale with a huge initial production (IP) rate. The Kardell Gas Unit 1H came in at an IP rate of 30.7 million cubic feet of natural gas equivalent during the initial 24 hours. This was apparently the highest IP rate ever reported for a well in the Haynesville Shale.

Devon Energy only had a 48% working interest in the well, with the balance held by Crimson Exploration Inc. (OTCBB:CXPO), an exploration and production company that trades on the Over the Counter securities market. The good news for Devon Energy shareholders is that the company has a 100% interest in what it calls its primary leases in the Haynesville Shale.

Bakken Blowout
In the Bakken Shale, Whiting Petroleum (NYSE:WLL) also reported a well with a large IP rate. The Maki 11-27H produced 4,345 barrels oil equivalent (BOE) from the middle Bakken during a 24-hour test period. This was also the highest IP rate from a Bakken Shale well ever reported.

It is interesting to note that the well was completed with only an 18 stage hydraulic fracturing operation. Several companies have completed wells with many more fracturing stages. Brigham Exploration (Nasdaq:BEXP) just completed a Bakken Shale using a 28 stage fracturing operation.

Industry Cuts Costs
Newfield Exploration Company (NYSE:NFX) is shaving costs in the Woodford Shale by drilling multiple wells from a common pad. In 2009, 85% of its wells will be drilled from common pads.

Newfield Exploration has also increased lateral lengths in its horizontal drilling program. This has led to a continuing sharp drop in finding and development costs as the wells are more productive.

Southwestern Energy (NYSE:SWN) has increased its drilling efficiency as well in the Fayetteville Shale. Two years ago, the company was drilling and completing wells with laterals of approximately 2,500 feet here in 18 days, at a cost of $ 2.9 million. During the quarter just ended, the company average well cost was about the same, but it was drilling them in 12 days with laterals twice as long in some cases. The yields of the newer wells were much greater with higher production rates.

The Bottom Line
The exploration and production industry is relentless in its goal of lowering costs in developing its properties. This goal takes on added importance, as prices for natural gas stay low for an extended period of time. (For a primer on the oil industry, refer to our Oil and Gas Industry Primer.)

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By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

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