Drill oil rich to Fill, collect zero cost natural gasYou've all heard of drill to fill but nowadays, drill oil rich to fill would be more appropriate.
Subject to lease expiries etc, that should be the result of Kelt connecting Wembley with Pouce Coupe via this proposed new pipeline. Always drill oil rich locations first. Why? Because your natural gas all in cost (D&C, royalties, cash costs) is essentially zero - in some cases of high oil %, that's based on only a 2 year production window for D&C. This is why Exxon bought Pioneer - for the free natural gas (based on long accepted activity based costing practices). See Tourmaline presentation on their view of the cost of natural gas in their liquids rich fields.
Why is NG cost $0?
Because if you drill an $8M 50% oil well that produces 200,000 barrels of oil over the first 2 years, your cost per barrel of oil is $40. If your corporate cash costs are $15, then you can assign all of it to the oil part ie $30. Then you have royalties. If oil is C$100 and NG is $25, your average realized is $62.50, if royalty is $9, then x 2 (oil pays for everythting) = $18. $40+$30+$18 = $88. Oil Realized = $100. Profit on the oil = $12. Cost on natural gas - D&C + cash + royalties = $0. Why? Because you've assigned all the cost to the oil side.
So there are other reasons to be drilling Oak and Pouce Coupe West obviously (lease expiries, field not yet integrated but generally in an integrated field, you drill the oil rich locations first. Once you've filled those 3rd party plants with natural gas from oil rich locations, then you consider drilling your other drier play (Oak). See Coterra - they own the old Cabot dry fields and they're spending diddly there in 2024 - its all going to their core Permian play (considered very dumb for them to have acquired Cabot).
Hope you enjoyed this narrative.
I'm not commenting on whether to buy or sell Kelt. That's up to you reader. Personally I'd like to buy more as cheap as possible. So when the share price goes down, I'm somewhat happy to be honest. But I'm also happy when it goes up????
PS - natural gas is natural gas whether it comes from an oil rich play or a dry gas play, you realize the same $$$. Of course if you don't hedge natural gas, you'll still be ok with oil rich. With dry gas, you might not make it...
PPS - my personal sense is after this year Oak should be drill to fill. Don't expand beyond 45MMcf plant capacity. Its just not that economic compared to Wembley and Charlie Lake. There's also no money in it to supply to LNG Canada (see the US experience), it only benefits the actual exporters. Report it separately. You're always going to be better off IMO - at least at current commodity prices - drilling more oil rich wells in Alberta, adding plant capacity, acquiring liquids rich acreage, etc etc basically growing the integrated field. Ideally Oak should be somehow connected to LNG but that's a different conversation.