SM Energy has its eye on surrounding acreage in the Williston Basin.
On July 29, the company announced that it had acquired 61,000 net acres from Calgary-based Baytex Energy adjacent to its Gooseneck project area in Williams and Divide counties. But it isn’t planning to stop there. SM Energy Chief Executive Officer Tony Best told analysts during a quarterly update that the company sees its highest potential for growing inventory within its current core development areas.
“A key part of our growth strategy is to see where we can add acreage in and around these core areas,” Best said. “You are going to see more emphasis on key acquisitions like we announced (with Baytex). We’ve got a very compelling set of assets right now and our focus is on continuing to exploit what we’ve captured already.”
The company acquired interest in 126 drilling spacing units under the Baytex acquisition, 81 of which will be operated by SM Energy. The $330 million deal brings the company’s Gooseneck assets to 97,000 net acres. SM Energy expects to fund the acquisition with cash on hand and borrowings under its existing credit facility. Baytex said the sale is part of its plan to direct capital to the highest rate of return projects in its portfolio. Best said the financial transaction was the largest in company history, and President and Chief Operating Officer Jay Ottoson said it comes with “a ton of upside.”
“My math suggests … that we only need to drill one good well per spacing unit to pay for this,” Ottoson said. “We’re drilling our other Gooseneck acreage at four Three Forks wells per spacing unit and we haven’t even gotten to the Bakken yet.”
The company touts itself as the leading operator in terms of well performance in the Gooseneck area while improving cost efficiencies by shaving 30 percent off of drilling time over the past two years.
“We don’t think we’ve reached the limit on our optimization yet, and we expect to continue to improve our wells,” Ottoson said.
Based on May production data from the North Dakota Department of Mineral Resources, the combined pro forma of SM Energy and Baytex assets moves SM Energy to the number 14 slot among the top 50 Bakken oil producers in the state for operated, non-confidential wells with an average daily output of 23,763 barrels.
The Baytex acreage lies between SM Energy’s north and south Gooseneck areas, and the company is confident it will be able to develop the new acres to produce similar results to Gooseneck.
Sand loading to improve well results
SM Energy has been testing new completion techniques including longer laterals that run 30 percent longer compared to last year and increased sand loading. Results on the longer laterals will not be available under later this year as the company prefers to change the variables one at a time on its fracks.
“We fully expect longer lateral wells to outperform short lateral wells,” Ottoson said. “I think it’s a no-brainer to some extent.”
In the Bakken and Eagle Ford regions, SM Energy tested seven wells each with much higher sand loading which showed a “compelling economic value” according to the company. Several wells were drilled at the shorter 5,000-foot lateral, but with twice as much sand per lateral foot, shifting from 1,100 pounds of sand to more than 2,000 pounds per lateral foot. It resulted in higher sustained production rates over time and 40 percent higher returns. In the Bakken, the improved completion results have caused the company to re-evaluate its spacing.
“Clearly when the wells are performing this much better you have to look at whether you can push them a little closer together,” Ottoson said.
SM Energy has typically used a sliding sleeve completion technique on its Three Forks wells and even with the sand loading increase, well costs are lower than other operators, the company said.
“We saw a 45 percent rate of return in Gooseneck and the numbers are getting better over time,” Ottoson said.
He added that 90 percent of the company’s wells in the area are connected to gas pipelines and the other 10 percent are coming on soon in order to avoid flaring. However, Baytex had been trucking oil from its wells so SM Energy feels there is an opportunity to connect to oil sales as it has done on its own acreage.
“We think there’s a positive associated with that in terms of our economics which we, frankly, have rolled into our acquisition economics,” Ottoson said.
‘Big, chunky assets’
In addition to its faster drilling times, SM Energy said average daily production from its Three Forks wells increased by 3 percent over the prior quarter and increased 21 percent from the second quarter of 2013. Also during the second quarter, the company completed 12 gross wells.
“The whole theme here is bigger, stronger, faster,” Ottoson said. “If you go back four or five years, this company didn’t have these big, chunky assets that you could really work on. This is a huge opportunity for us, to go in and make this stuff better and more valuable.”
The company’s overall production exceeded its guidance range of 136,000 to 143,000 barrels of oil equivalent per day, boepd, in the second quarter, climbing to 147,000 boepd which is led by its Eagle Ford assets in Texas. SM Energy runs five rigs in that region and completed 23 wells in the quarter, averaging 83,000 boepd.
It also is developing acreage in the Powder River Basin and completed one well in the second quarter. Though it ran a 3,300-foot lateral due to an oddly configured lease, it turned out to be one of the best wells the company has drilled to date in the basin with a 30-day initial production rate of 737 boepd. During 2014, the company acquired approximately 33,000 net acres in the Powder River region resulting in a total asset base of approximately 166,000 net acres. SM Energy plans to add a fourth rig in the Powder River Basin in the third quarter of 2014.
In the Permian Basin, the company completed two of its most productive wells in the program with a peak 30-day initial production rate of 1,093 boepd on one well and 1,559 boepd on the other.
