In order to fully digest and appreciate the opinions that I will present, I encourage you to watch the following video tutorials:
They're short, so bear through the fluff.
https://www.youtube.com/watch?v=rC8Z38Qc0Q4
https://www.youtube.com/watch?v=zt9dk_cTclU
This one includes an ICD lesson:
https://www.youtube.com/watch?v=som4c1MIzAo
You now know what SAGD is and how an ICD can enhance production and efficiency. We also know what the main problem plaguing Phase I has been. To sum it up = 'Conformance'. That is to say that there have been variations in steam distribution between the heel and toe of the well pair. An ICD's main function is to regulate steam distribution in well-pairs. The success of 2P1 has been phenomenal, beyond even my rosy-eyed expectations. The March 17th news release provided some very useful information if you were able to read between the lines.
Phase I is still very much a 'feel' operation. Leading up to the ICD era, STP engineers have been attempting to force steam down the injector and producer wells in order to achieve conformance. Specifically, they attempted High Pressure Steam Stimulation or HPSS to accelerate conformance. This method failed for the most part. The initial ICD results have, on the other hand, been stellar.
For the bulk of February, with the ICDs installed in 2P1, they achieved a steady rate of 700 bbl/d with a SOR of 2.8. Now, here comes the interesting part. In the March 17th update, they stated that "The well pair is currently TESTING in the field at bitumen rates between 700 bbl/d to 900 bbl/d with corresponding SORs of 2.8 to 2.1." Why the fluctuation you ask? Fine-tuning and tweaking, steam-injection rates in an effort to identiify the right combination of variables in order to achieve optimal conformance, and thus, production. I believe that 2P1, moving forward, will produce at ~900 bbl/d or better until decline sets in. As for the rest of the wells on Pad 2, I see no reason why ICDs will not work with similar results. The best part? Less steam (2.1 SOR) for MORE production. Outstanding.
Conformance levels of 2P1 ranged from 50-62% prior to the ICD installation, when the well-pair was producing at ~375bbl/d (or 38% of nameplate design capacity). This relationship tells us that oil production goes up with more gusto after conformance levels have reached at least ~70%. ALL of the literature I have read suggests that ICDs can increase production to levels in excess of nameplate. Thus, if 2P1's 900 bbl/d was attained when conformance levels were at say 80-90%, then it's POSSIBLE that 1000 bbl/d could be eclipsed. The only way we will know this for sure is if STP releases conformance levels of 2P1 during March. Anyway, just something for you to keep an eye out for. For now, I will proceed under the assumption that 900 is peak for any well-pair.
Pad 1 - We were informed that 1P5's initial performance resulted in x2 fluid volume. It's somewhat of an ambiguous answer, but let's assume that x2 oil was initially produced thanks to the ICDs. All of Pad 1's well-pairs had, what I assumed to be, conformance levels less than 40%. Normally, steam chamber temperature takes up to 4 months(with conformance!) before reaching levels friendly for production. The lesser the current conformance levels, the longer it takes to reach optimal conformance levels after ICD installation. 2P1 took only 2-3 weeks, but 1P5 has a much longer way to go. As such, we will only know to what degree the ICDs have ameliorated 1P5's performance after the next news release. On the same note, I submit that soon after the March 17th NR, conformance levels in 1P5 started to show marked improvement. Why? I do not believe that the deal management inked on the 26th could have occurred if Pad 1(post ICD) was a bust. With Pad 1 showing that ICDs can turn it around, it just adds that much more leverage for management to approach an institution for a deal. And what a deal they got. I actually got an erection when I read the news release. Anyway, my guess is that Pad 1 production rates will be commercial. Whether or not it reaches the levels I anticipate for Pad 2, roughly 90%+ of nameplate, I do not know. However, aside from the vertical spacing between the producer and injector, the 2 well pads are virtually identical. And the differences that do exist, presumably the same differences that are responsible for the dismal production on Pad 1, are being at least partially overcome thanks to the ICDs. Remember, the name of the game is conformance. Let's assume that the ICDs work reasonably well on Pad 1, but not with the efficacy on Pad 2, but well enough for Pad 1 to achieve 70% of nameplate production, then we'll have some very interesting months ahead of us.
Senlac
We keep talking about McKay when Senlac will be playing a MAJOR role in future production for STP. Did you guys know that Senlac's nameplate production capacity is 5,000 bbl/d? Why is it not at 5000 now? 2 reasons. 1) The cash crunch limited capex spending, so no chance to drill new wells for Phase L. Phase L, I estimate, will be able to generate roughly 3,000 bbl/d when humming. 3,000!!! 2) One of the wells(out of 3) in Phase K is basically shut-in due to liner failure or something to that effect and Phase H is running out of oil. The GOOD news is that by year end(or soonafter), Senlac will, in all probability, reach 4,000 to 4,500 barrels per day assuming that the engineers keep a tight schedule. Senlac has been, and WILL be, a cash cow for STP for at least the next 10 years according to management. They have 11 phases planned after Phase L is implemented, just to give you an idea. Now that capex spending has been restored, the aim will once again, as it has been in the past, to keep Senlac in the 4,000 and 5,000 bbl/d production range. Check the past operational updates for confirmation if you'd like. Senlac has been consistent.
Now the fun starts. STP's 2014 exit production rates can reach ~14,000 bbl/d. (McKay ~9,500 + estimated Senlac ~4,500) Forget about breakeven. I am talking about the potential for STP to be pulling down some serious cash by year end. All this talk about debt that is payable in 2016 and 2018 is irrelevant at this juncture. It's all about production. We (STP) have 2 years and 3 months before the first debt obligation comes due. I am talking about 14,000 bbl/d by Dec 31, 2014. Gross revenue, at ~$90CDN gives us between $35 and $40 MILLION PER MONTH. Not forgetting that Phase I expansion will be on the table for 2015.
Shatner's crazy? I don't think so. Credit Suisse would NOT have inked a deal such that it was with STP if they didn't have something tangible to base their decision on. I have said it many times. The ICDs have changed the game completely. Having Pad 2 reach 90% of nameplate design capacity allowed the notion of a deal like this to enter the discussion. Showing that Pad 1 has the potential to reach commercial levels of production in a reasonable time span made this deal happen.
You can disagree with me all you like. The reality is that 2P1 can and will produce at 800-900(or more!) bbl/d and Senlac will maintain production levels of 4 - 5,000 bbl/d starting December or January. Add that up and then add the other 11 ICD-fitted well-pairs at McKay.... Not too shabby, eh?
We'll have to wait and see how 1P5 is doing to see if I'm full of chit or not. I said it right after the news release on Feb 10th, that if 1P5 shows signs of life, I mean real a$$ whooping life similar to 2P1, this company will officially be on the path to redemption and there will be no turning back.
Just to add a little gravy to the discussion, consider the following catalysts and their potential effects on the share price:
Upcoming catalysts:
- March exit production numbers(~5,000 barrels)
- 1P5 data
- nixing the $51mil capex to drill more wells on Pad 2
- McKay breakeven by end of June
- Northern Gateway Pipeline
- Keystone XL Pipeline
By the way, there was another positive review to add to the pile, this time by Raymond James:
"Southern Pacific Resource (TSE:STP) was upgraded by Raymond James from a “market perform” rating to an “outperform” rating in a research note issued on Friday, Analyst Ratings Network.com reports. The firm currently has a C$0.50 target price on the stock, up from their previous target price of C$0.30. Raymond James’ target price indicates a potential upside of 185.71% from the stock’s previous close."
How that **expletive deleted** over at TD could give this stock a 20 cent target is beyond me. An engineer no less. Someone who SHOULD be able to interpret data released by a company and have at least a fundamental understanding as to how a new technology(ICDs) can positively impact production levels. What a joke. It annoys me just thinking about it.
Regardless of analysts' opinions, I hope that we all make a lot of money being invested in this company.
Shat