Williston Basin superstar Continental Resources Inc. said following disclosure of its latest Bakken acquisition that opportunities for such mega deals in the region may be coming to an end.
“We expect to see those opportunities diminish, and so this is especially one that fits us real well,” Harold Hamm, Continental’s chairman and chief executive officer, said of the company’s recent $650 million deal in a Nov. 8 conference call with analysts and investors.
Others have tied up most of the available state and federal acreage, Hamm said, while takeover candidates in the way of smaller exploration and production companies are vanishing.
“In my estimation, we’ll see a few of them going forward,” he added. “There’ll still be a few, but perhaps that window is closing.”
Deal includes 120,000 acres
Continental, in its latest deal, entered into an agreement with an undisclosed seller or sellers to acquire Bakken producing and undeveloped properties for $650 million. The property includes leasehold of roughly 120,000 net acres, primarily in Divide and Williams counties, N.D., and production of about 6,500 barrels of oil equivalent per day.
Continental is currently the largest leaseholder in the Bakken, with 984,040 net acres as of Sept. 30. If completed, the proposed acquisition will increase this total to 1.1 million net acres. The Oklahoma-based company operates a large portion of the acreage that it’s acquiring, and more than half of it is held by production.
In addition, Continental said it has entered into an agreement to sell its producing crude oil and natural gas properties and supporting assets in its East Region for $125 million in cash, using the proceeds to help pay for the Bakken acquisition. The East Region primarily includes properties east of the Mississippi River, including the Illinois Basin and the state of Michigan, among other areas. Production from the properties included in the sale agreement averaged about 1,100 boe per day during this year’s third quarter.
“We are divesting non-core, conventional assets and re-investing the proceeds in an attractive acquisition that further builds our strategic, core position in the Bakken,” Hamm noted.
Transaction closes at year-end
If the Bakken acreage acquisition is completed as planned, the company said it expects additional 2013 drilling capital expenditures will be largely offset by incremental cash flow from the acquired properties. Both transactions are expected to close prior to year-end 2012.
Continental reported strong production on average for the third quarter of 2012, setting an overall record of 102,964 boe per day, 55 percent above third quarter 2011 output and 9 percent above this year’s second quarter. September production was 105,874 boe per day, the company reported.
Bakken-Three Forks production, which represents just over 60 percent of Continental’s total output, was 62,453 boe per day for the third quarter, a whopping 81 percent increase over the 2011 third quarter and 17 percent higher than this year’s second quarter, the company said.
In terms of operated wells, Continental completed 46 gross (34 net) wells in the Bakken in the third quarter of 2012, with 41 gross (29 net) wells in North Dakota and five gross (five net) wells in Montana.
Wells averaged 1,076 boepd
Company-operated wells completed during the third quarter averaged 1,076 boe per day for North Dakota Bakken wells and 886 boe per day for Montana wells in their initial one-day test-periods. Twenty-two of Continental’s 41 gross operated wells in North Dakota had initial production test rates of more than 1,000 boe per day, while two of its five operated Montana wells surpassed that level in the third quarter of 2012.
Bakken well performance continues to meet the company’s expectations, Continental said.
A notable project completed during the recent quarter was the Antelope-Bohmbach ECO-Pad in McKenzie County, consisting of the Antelope 3-23H and 4-23H and the Bohmbach 3-35H and 4-35H wells. The four wells tested at an aggregate initial rate of 6,240 boe per day in total, for an average of 1,560 boe per day per well, with average flowing tubing pressure of 3,800 psi. Continental has an 85 percent working interest in the wells.
In October the company announced a new five-year plan to triple production and proved reserves by year-end 2017.
“2013 is shaping up as another year of production growth with efficiency gains,” Hamm said. “We expect 30-to 35 percent production growth next year, the first year in our new five-year plan. …”
Big plans for SCOOP
Continental also has big expansion plans for the so-called SCOOP play of southern Oklahoma, in helping to attain its triple growth strategy. Production there during the third quarter was 5,183 boe per day, a 327 percent increase over last year’s third quarter and 64 percent above this year’s second quarter output.
Meanwhile, efforts by Continental to develop new opportunities to market Bakken oil to refineries and other markets on the East, West and Gulf coasts, are paying off in big ways.
“Additional pipe and rail infrastructure has broken the logjam of Bakken oil, and we are marketing our barrels directly to refineries on all three coasts, as well as in Canada,” Hamm said. “This has resulted in reduced oil price differentials … in the third quarter.”
Winston Frederick Bott, Continental’s president and chief financial officer, said several third-quarter operating trends should help the company increase production more cost efficiently in 2013, and continue to build cash flow.
More equipment available
“Firstly, we are starting to see increased availability of drilling and completion equipment and crews in the Bakken,” he said. “The supply of services and equipment is starting to come in line with demand.”
Moreover, he said 45 percent of the company’s operated drilling fleet is situated on multi-well pads, versus 10 percent in the first quarter, allowing the drilling of second and third production wells in a single spacing unit. Because pad drilling minimizes rig moves, he added, the average cost per rig move has been reduced 17 percent this year.
“Pad drilling helps reduce drilling cycle times,” Bott said, noting that currently, the company is saving 10 percent per well on its ECO-Pad projects.
And though day rates for newer upgraded rigs are higher, “we’re offsetting the higher cost with faster cycle times,” he added.
Wells per rig increased
For example, he said the average number of wells drilled per rig increased 33 percent to 1.2 wells per rig month in the third quarter compared to the first quarter. Average days in the lateral, the most critical part of the hole, dropped 18 percent through a combination of greater efficiency, improved execution and accuracy.
Continental recently demonstrated its execution capabilities with the North Dakota-Lewisville well, which set a Williston Basin depth record, drilling to a total depth of just over five miles in 26 days.
“So I think the headline is if you take our drilling cycle spud-to-spud, well costs are 25 percent lower in the third quarter compared to the first quarter of the year, in large part because of these drilling efficiencies,” Bott said. “This is on top of the 12 percent improvement in spud-to-spud well costs that we had last year.”
On the financial side, Continental’s third-quarter earnings before interest, income taxes, depreciation, depletion, amortization and accretion, property impairments and exploration expenses, EBITDAX, were 492.3 million, a 46 percent increase compared to the 2011 third quarter.
