Longevity in the Bakken is going to depend heavily on the outcome of efforts to make Bakken rock in Tier 2 acreages economic in a low oil price environment. All while layered with additional capital constraints by a twice-shy Wall Street.
“If we look at the core of the Bakken, it is absolutely competitive with every core of every basin,” energy analyst Sarp Ozkan, with Enverus told the Williston Herald. “The Antelope area of the Bakken is probably one of the top economic areas in the country. It’s right on par with the Karnes Trough and the Stateline acreage in the Delaware. But Antelope, in terms of drillable locations — you can count them on two hands, the number of locations left in the Bakken Antelope area.”
Companies with Tier 1 or close to Tier 1 acreage will be the ones driving 2020 production, Ozkan said. These generally include Continental, Hess, Marathon, XTO, and a few others.
“This is going to be the year of Continental for the Bakken,” Ozkan said. “They are the ones who are going to push. They are the ones who are going to try to revitalize interest in both the remaining Tier 1 and Tier 2 locations. And I think the results that they get form their aggressive Bakken program this year will drive what happens when prices recover in terms of how much capital people are willing to put into this versus other basins.”
Continental’s Senior Vice President for HSE and Government Regulatory Affairs talked a little about Tier 2 step-out areas that Continental has been exploring during the Montana Petroleum Association’s annual conference last year.
Type curves for some of the wells in those areas are outperforming legacy wells by as much as 100 percent in some cases, he said.
“We are looking at sand, the length of perforations, and all of those things that allow us to really bring that production forward and make it a much more valuable play,” Hulsey said.
Smaller companies, however, could have trouble repeating Continental’s success in the current environment of constrained capital, combined with low oil prices. If they don’t have enough production going, they cannot both service debt and fund the large capital expenditures necessary to drill new wells, particularly areas where the wells may require more research and development.
That has left several of the smaller companies seeking buyers for less economic assets and cutting costs by laying off employees, trimming executive compensation packages, among other measures.
Whiting and Oasis Petroleum both laid off employees last year, and have taken other cost-cutting moves since then. Oasis, for example, is closing its Well Services company and transitioning that work to Halliburton.
Oasis executives also made clear during the company’s most recent earnings call that they would like to find a buyer for the recently completed Wild Basin gas plant in McKenzie County, saying it is a “coveted” asset, in whole or in part, whether in their hands or someone else’s.
“A lot of the debt is legacy debt from the growth area,” Ozkan said. “Wall Street used to sort of give everyone a pat on the back for growing as quickly as they could. And all the executive compensation was based on how fast companies were growing productivity.”
Now, however, companies find themselves with both staggering loans to service along with funding the capital expenditures necessary to keep production going, all on existing cash flow. Technology has helped drop breakevens in the Bakken into the 20s for most areas — but with oil prices on the world stage set to remain low through 2020, that’s likely to mean a lot of mergers and acquisitions for 2020 as small companies try to combine production to achieve feasible cash flow.
“I think it will be more of a blood bath this year than we’ve seen in prior years from a financial standpoint,” Ozkan said. “Everyone is cutting their capex, there is no debt available to fund a program with, so it just depends on whether you can live within cash flow.”
Ozkan estimates between 7 to 10 years of core inventory left in the Bakken, a prediction similar to one made recently by Director of Mineral Resources Lynn Helms, who said Bakken production is likely to peak in the next five years, after which it would plateau for about 15 years.
“All this, of course, is taking into consideration that this is based on what we know today, the technology we have today,” Ozkan said. “The industry is very good at finding new ways, new techniques, new technology and new rock to go and exploit. So when we talk about this a year from now, when we update this report, we could see something has happened over the last year that might allow us to down space, and make the tier 2 acreage more economic. Maybe tier 3 will look like a tier 1.”