Aftermarket on Wednesday March 17, one of the Calgary oil and gasboutique securities firms, Peters & Co., issued an updated Cardiumreport – which in a nutshell said
- They estimated decline rates on wells were higher than expected (meaning the production levels of the wells dropped faster than expected)…
- …which means operating costs are higher as costs get amortized over a smaller production base…
- …and once you factor in the very high land costs recently paid by some companies, the break even on “full cycle”, or all-in costs, in some of the Cardium plays (and there are several) were up to $75/bbl in some cases.
What this means for investors is that it’s quite possible the nextfew buyouts could be done at a lower valuation than the most recentthree (Berens Energy, Result Energy and West Energy).
The Peters report rightfully pointed out that the Cardiumdata set is STILL so SMALL (only 35 wells over a huge area – theformation stretches 1000 km) that these results could be dramaticallyrevised – up or down – in the next quarter as even more wells comeonstream.
One big revision potentially happened today, Monday March 22,as Bellatrix Explorations (BXE-TSX) announced a boomer well of 910barrels of oil equivalent per day (boe/d), in their Willesden GreenCardium play (81% oil, 19% natural gas). There was no mention of howlong the duration the production test was.
This would belie the Peters’ report conclusion – butBellatrix also noted that two Cardium wells hit only 100 boe/d, which is50%-60% of average IP (initial production) rates in the Cardium so far.
Between the Cardium being SO popular, this negative report and mystrong profit position, the Oil and Gas Investments Bulletin portfoliolocked in profits of 60%, 70% (over 2 months) and 172% (over 6 months)on its remaining Cardium positions in the first two weeks of March, notincluding the West Energy take-over.
How future valuations will be affected, only time will tell.
As background, through the second half of 2009, analysts quicklymoved the new Cardium horizontal well play up to #2 on their comparisonof profitable plays in the Western Canadian Sedimentary Basin (WCSB)based on some initial well results. (Other plays (or formations) includethe Viking, the Lower Shaunavon, the Bakken, the Pekisko etc.)
The market started smoking “hopium” and quickly convinced itself thatwith improvements in completion techniques (fracking), the Cardiumeconomics could approach the Bakken, and that productionlevels would be consistent across every acre of Cardiumlands.
Stocks started to fly upward. Then we saw three take-overs in theCardium in the first three months of 2010 – Berens Energy, Result Energyand West Energy (which was in the OGIB portfolio).
When analysts backed out their estimates of the value of theproduction in those buyouts, they came up with some very high guesses asto what the value of the raw Cardium lands were for the acquiringcompanies. (And of course, it was to their benefit to have that # be asbig as possible, so they could put the spin on that the rest of theCardium players still had lots of room to move…)
That caused stocks like Vero Energy and Bellatrix in my portfolio tofly up and up, and I took profits on the day West Energy was taken out –which so far, was very, very close to the top.
The Peters report said that from the limited number of wells to date,first year declines are 65%-80%. Using a hypothetical example, if awell has an Initial Production (IP) rate of 200 bopd in the first month,in one year it will only be producing 40-70 bopd.
They estimated the break-even price per barrel on the play –depending on which part of the Cardium – was $58 – $66 on a half cyclebasis. Think of that as meaning just the operating costs, and notincluding or amortizing in land costs. As comparison, the Bakkenbreak-even price is more like $40.
And once land costs are included – especially at some of the landprices being paid recently, up to $4 million per section – thebreak-even price goes up to $75/bbl. There is precious little profitmargin there!
(This is similar to what happened in the US shale gas plays.)
As an example, the report estimated full cycle economics in the EastPembina part of the Cardium – at $4 million per section land value –having only single digit return at US$80/bbl.
The Cardium has usually been ranked by analysts as #2 inprofitability of the WCSB plays. The Peters report estimated the medianreturn of the 8 reservoir plays to be 44%, and the horizontal wells atGarrington in the Cardium were dead last. The Garrington well profile(how long it will produce at what rate) was downgraded 15% by Peters,the most of any Cardium play.