PDC Energy has been the fastest-growing Niobrara producer, increasing output 39% in 2016 to over 65,000 boe/d in 3Q16, in part due to an aggressive capital program that has exceeded cash flow by about 50%. But this investment has paid off in above-average profits, and the outlook has improved after it recently enhanced its portfolio through an acreage swap with Noble Energy. This exchange boosted PDC’s middle-core acreage by 17% and more than doubled the number of extended-lateral drilling locations. Mid-reach and extended laterals will now make up about 65% of all wells going forward, compared with 15% historically. The longer laterals, combined with higher proppant volumes, are producing results significantly above the company’s type curve in areas like its LDS project. The increased efficiency is allowing the company to maintain its high production growth while reducing its rigs in the play from four to three in the 4Q16. |
Synergy Resources, a pure-play producer with a $1.85 billion market cap, also has ambitious growth forecasts as it concentrates on the “Wattenberg fairway,” an area it describes as the highest-quality acreage in the DJ Basin. The contiguous nature of the acreage gives it the ability to drill longer laterals with better economics. The production to date from mid-level wells drilled on the Bestway pad significantly exceeds its type curve in the region and is generating an IRR of 57% at current strip pricing. This has spurred management to more than double capital spending to $260-300 million in 2017 to drill 68 mid-length laterals and 34 long laterals. The company forecasts production growth from the current 10,794 boe/d to 17,000-20,000 boe/d by the end of 2017. |
Whiting Petroleum, which holds 129,000 net acres in Redtail field in the DJ Basin, has matched the drilling efficiency of the other major operators, reducing completed-well costs to $4.0-4.5 million. New techniques, such as the use of one string of casing all the way to total depth, has slashed drilling times, including a recent 10,000-ft well that took just 2.75 days. But oil prices have led Whiting to be more conservative about bringing wells on stream, and it suspended completion activity in 2Q16. That has led to an inventory of more than 100 DUC wells. Management recently said it has more confidence in the direction of oil prices, so it will begin to complete those wells in 2017, cutting the DUC inventory at least in half. Production fell from 14,500 boe/d in 4Q15 to 10,700 boe/d in 3Q16, but the completions should reverse the trend next year. |
In contrast to other producers with major DJ Basin positions, Encana decided to exit the play in October 2015. In its January 2015 analyst presentation, Encana touted the prospectivity of the play as it forecast a 40% increase in output in 2015 from its 51,000 net acres. But the rapid decline in oil prices eroded economics as the year progressed. Also, Encana only had an average 37% net interest in the play, which meant that it likely was not the operator on much of its acreage. When the company re-evaluated its portfolio, it decided to allocate capital to four “core” plays where it had more control of investment decisions and operations—the Eagle Ford, Permian, Montney and Duvernay—and exit the DJ Basin. Interestingly, the buyer was a firm 95% owned by the Canadian Pension Plan Investment Board, which evidently took a longer-term view that the quality of the acreage would generate significant returns. |
