With chronically low natural gas prices in North America, QEP Resources Inc. (NYSE: QEP) is slashing spending in the dry-gas Haynesville Shale and now plans to direct 89 percent of its capital budget to liquids-rich plays in the Rockies and Midcontinent.
This year, QEP hopes to increase its liquids production from 14 percent to 20 percent.
The Denver-based company wants to increase that production organically. To that end, it’s adding $50 million to its $1.3 billion to $1.5 billion spending plan for the year.
The increase is meant to accommodate additional drilling in the Texas Panhandle and western Oklahoma, in the Uinta basin of Utah and in the Bakken of North Dakota.
The additional money for North Dakota allows QEP to run a fourth rig in the play and to manage cost increases in the Williston basin, the company said in recent financial filings.
QEP hopes those expenses can offset each other, to some degree.
Those higher costs are partially the result of drilling in a high-pressure area of the basin and partially from an expectation that completion fluids will get more expensive this year, according to CEO Charles Stanley. But they also come from drilling inefficiencies.
Asked during its recent first quarter earnings call whether a fourth rig would lower costs in the Williston basin, Stanley said, “We haven’t seen enough pad drilling activity to really get a good handle on what sort of economies of scale we should see. But our experience at Pinedale and other places where we pad drill would indicate that.”
With a fourth rig, QEP could keep rigs on pads longer, and could maximize completions crews and infrastructure hook-ups, according to Stanley. On paper, those efficiencies should shave about $500,000 off the cost of each Bakken well QEP drills, Stanley said.
“Whether we can actually realize that … the jury is still out on that,” he added, noting that a fifth rig in the play would be the “sweet spot” for maximizing those efficiencies.
From 12 to 50 percent
How would those savings play into the economics of the Williston basin?
QEP estimates its Bakken wells this year will cost between $9.7 million and $10.4 million each, a range dependant in part on lateral lengths between 5,000 and 12,500 feet.
Those wells have an average estimated ultimate recovery, or EUR, rate of 500 million barrels of oil equivalent (or a range between 300 million and 900 million barrels of oil equivalent).
In November 2011, QEP estimated a pre-tax rate of return of 26.4 percent for its average well, assuming EUR rates of 550 million barrels of oil equivalent at an average West Texas Intermediate price of $85 per barrel and a completed well cost of $9.5 million.
That average is the midpoint of a much wider range: as low as 12 percent for wells with EUR rates of 450 million barrels and oil prices at $75 per barrel, and nearly as high as 50 percent for wells with EUR rates of 650 million barrels and oil prices at $95 per barrel.
QEP maintains 90,000 net acres of Williston basin acreage in North Dakota, primarily in a large swath along Lake Sakakawea and the Fort Berthold Indian Reservation. The company operates 32 producing wells in the Williston basin — 26 in the Bakken and six in the Three Forks — and holds an interest in 106 producing non-operated wells.
QEP averaged 5,728 net barrels of oil equivalent per day during the first quarter.
The Powder River basin
How does that compare to other plays in the QEP portfolio?
QEP is currently running one rig in the Haynesville, but plans to drop it if natural gas prices don’t improve by the third quarter. Stanley said QEP wouldn’t kick start Haynesville investment until prices are comfortably above $4 per thousand cubic feet.
That’s more than double the current price.
When asked where the company would direct its capital currently tied up in the Haynesville, as it becomes freed up, Stanley said, “Well, the Bakken still makes sense,” but added, “Obviously we’d like to put capital into the Sussex and the other plays in the Powder River basin to the extent that we can gain some traction on permits.”
Although still evaluating its properties in the Powder River of Wyoming, QEP likes its economics. The company estimated a pre-tax rate of return of 42 percent for its average well in the Sussex play, assuming EUR rates of 350 million barrels of oil equivalent at an average West Texas Intermediate price of $85 per barrel and a Nymex natural gas price of $4.50 per million British thermal unit, and a completed well cost of $6.1 million.
In the Shannon, another play in the Powder River basin, QEP estimated a pre-tax rate of return of 49.3 percent for a well with an EUR rate of 350 million barrels of oil equivalent at an average West Texas Intermediate price of $85 per barrel and a Nymex natural gas price of $4.50 per million Btu, and a completed well cost of $6.2 million.
But in the Niobrara, also in the Powder River basin, QEP estimated a pre-tax rate of return of 19.9 percent for a well with an EUR rate of 300 million barrels of oil equivalent at an average West Texas Intermediate price of $85 per barrel and a Nymex natural gas price of $4.50 per million Btu, and a completed well cost of $7.3 million.
While oil is currently above $100 per barrel, natural gas is trading below $2 per mcf.
