December 28, 2016 • Vol. 6, No. 11docFinder alert
docFinder alert

Canadian Producers Boosting Investment in Low-cost Saskatchewan Viking Light Oil Play

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Teine drilling Viking HZ wells for C$650,000

Teine Energy

September 8, 2016

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Raging River buys 3 deals; move type curves higher

Raging River Exploration

November 28, 2016

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When it comes to Canadian unconventional resources, the Montney and Duvernay shales generally get all the press, but in this current low oil price environment, the Viking play in southwestern Saskatchewan and southeastern Alberta has been attracting rapidly increasing interest and investment. The Viking formation holds vast quantities of oil trapped in lower permeability sands with intermittent shale intervals. Companies have been vertically drilling in this play for more than sixty years; however, the results have typically been relatively unimpressive, with IPs of ~40 b/d and estimated recovery rates of just 4-6% of total oil in place. These anemic numbers made large portions of the play uneconomic to exploit, but the advent of horizontal drilling and advanced completion techniques, such as multi-stage fracs, are unlocking a large and valuable resource for Canadian investors. In fact, the Viking has prompted a surge of M&A activity. In 2016 alone, more than US$1.3 billion in transactions have been completed.

To study the reported insights and assumed economics of these deals, we turned to docFinder, which provides us with the ability to quickly compare and contrast the players, including several lower profile Canadian juniors. We found that E&P companies are discovering that because of Viking’s shallow depths, they can tap highly desirable light oil (36-40 degrees API) at costs that are dramatically lower than other tight plays. Clearly, the Viking is becoming attractive in a severely capital-constrained industry.

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The largest of the 2016 acquisitions was Teine Energy’s $767 million purchase of Saskatchewan assets from Penn West Petroleum. The assets Teine purchased include a prime position in the Dodsland Viking light oil area, as well as medium and heavy oil properties. Teine is a private company that is backed by the Canada Pension Play Investment Board, and this acquisition catapults them to being the leading Viking producer at ~20,500 boe/d. Teine has drilled more than 1,000 horizontal wells to-date and notes that, at just over $36/bbl, it has the lowest WTI-based half-cycle breakeven price of any North American unconventional resource play. Teine reported that it has lowered its total cost for drilling, completing, equipping, and tying-in a Viking well to just C$650,000. This all-in investment figure is less than 10% of the cost of wells in other Canadian resource plays, and such a low number implies a total capital efficiency of about C$15,000 per daily barrel. According to the company, the economics of this investment boast an internal rate of return (IRR) of around 46% at current strip pricing and a time to payout of under two years. Teine says that after the Penn West acquisition it has more than 5,000 de-risked potential drilling locations.

Raging River Exploration is another emerging Canadian junior which has built its Viking portfolio through three acquisitions totaling $219 million, including the corporate purchases of Rock Energy and Anegada Energy, in the last twelve months. River’s assets are located entirely in the Dodsland Viking play in Saskatchewan, where it has grown production from 2,000 boe/d at its inception in 2012 to 17,800 boe/d for 2016. Raging River is forecasting another 41% growth in output, which is 93% oil, by 2018. At an onstream capital cost of just C$675,000 per well, the company can generate an internal rate of return of 52% at $45/bbl oil and a 75% rate of return at $50/bbl oil. The company estimated it has more than 2,500 risked remaining economic drilling locations at current strip pricing.

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featured.slides from docFinder

Slide Slide Slide Slide

Tamarack

Payout on Viking wells range 7-18 months

November 7, 2016

Whitecap

400-500% rates of return in Viking

December 7, 2016

Crescent Point

Crescent's Viking play has lowest-cost wells

December 7, 2016

PrairieSky

Royalty firms attracted to Viking's reserves

December 1, 2016

Tamarack Valley likes the Viking and its November 2016 $304 million purchase of Spur Resources says so. That deal includes ~300,000 net acres in the Consort and Esther areas of southeast Alberta and the Milton and Hoosier areas of southwest Saskatchewan. Spur, spurred Tamarack’s production by 57% and added 720 gross low-risk drilling locations, including 483 that the company estimates will pay out in less than 18 months. As for capex, Tamarack estimates the investment per well will range from C$650,000 to C$725,000, one-fourth of the cost of wells on its existing inventory. The estimated rates of return on four of the five acquired areas range from 148% to 215%.

Whitecap Resources is an oil-focused Canadian junior that continues to grow rapidly despite the price cycle. In fact, Whitecap has driven volumes from 1,433 boe/d in 2010 to 45,700 boe/d in 2016 a compound annual growth rate of 19%. Whitecap likes (new) plays that offer predictable, repeatable low cost development with larger potential. The Viking fits the plan which is why Whitecap recently expanded its position through the May 2016 $460 million acquisition of 450 net drilling locations in southwest Saskatchewan from Husky Energy. Whitecap is now the third most active driller in the Viking after Raging River and Teine Energy, having completed 279 wells. Interesting enough, Whitecap’s estimated payout periods are the lowest in the industry at under six months.

Crescent Point Energy is one of Canada’s largest oil-weighted E&Ps, with production of about 172,000 boe/d. The company’s traditional core area has been the Canadian portion of the Williston Basin, where it generates about 60% of its output. But in 2017 Crescent Point is allocating 25% of its capital expenditures to southwest Saskatchewan where it plans to drill 270 wells. Crescent is the fourth most active driller in the Viking , where it expects 10% growth in 2017, double the rate of its larger Williston position and or deeper objectives. Like the others, Crescent Point is attracted to the low-cost wells, quick payouts, and attractive rates of returns of about 100% or higher.

PrairieSky Royalty, which was spun out of Encana in 2014 is a true believer in the Viking for its superior economics, short cycle times, low capital requirements, and best yet, its long life. The firm notes the wells can produce for more than 50 years and that’s why the Viking was the focus of one of its major acquisitions, the 2014 $617 million purchase of Range Royalty Ltd.

 

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