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FAREWELL-TO-OVERLYHYPED-GAS-WELLS - TheMotleyFool.com

Farewell to Overhyped Gas Wells?

http://www.fool.com/investing/value/2010/03/23/farewell-to-overhype...

Toby Shute
March 23, 2010

Last month, I told you that the Eagle Ford shale play in South Texas is the "play du jour." Industry participants are piling into this play like
crazy -- from big boys like BP (NYSE:
qs-source-isssitthv0000001"">BP) and Chesapeake Energy
(NYSE: qs-source-isssitthv0000001"">CHK) to small fries like Rosetta
Resources (Nasdaq: qs-source-isssitthv0000001"">ROSE) and Swift Energy
(NYSE: qs-source-isssitthv0000001"">SFY).

Encouraging early results are now being reported regularly. But before we start scoping out the latest numbers, let's revisit the theme of well test PR hype.

I took a stand against 24-hour well test reporting last year, when blowout numbers were being reported in the Haynesville shale. In many cases,
those numbers are highly
misleading, as these flow rates tend to decline dramatically.

Take the case of Devon Energy (NYSE: qs-source-isssitthv0000001"">DVN), which reported a 30.7 million-foot-per-day stunner
late last year. On its fourth-quarter conference call in February,
Devon disclosed that after 90 days, the well was flowing at "a little
over three million cubic feet per day."

I'm a little less worried about these sorts of stunts going forward, now that the industry seems to recognize that lower initial flow rates should help to maintain pressure, avoid formation damage, and increase
ultimate recovery. Petrohawk Energy (NYSE: HK), for example,
announced in its fourth-quarter release that the firm is expanding its
use of "restricted rate production practices" in the Haynesville.

I'm still not crazy about 24-hour rates, and vastly prefer to see 30-day or peak-calendar-month rates, but I suppose there's also an argument to be made for getting new information to investors quickly. I
think I will back off my hard line against relaying this information,
but I will also try to put it in its proper context for you. That's
something the companies themselves are not always eager to do.

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Oil & Gas ProPermalink Reply by Skip Peel - Mineral Consultant on March 23, 2010 at 9:34
I found this article to be quite timely considering the volume of Internet reports announcing the recent Cabot King G.U. #1 completion in San Augustine County. Does this sound eerily like the Kardell well referenced in the above article. It should as the Cabot report fails to make any mention of pressure or choke setting. It looks suspiciously like a company risking the EUR or formation damage so that they can generate the max hype.

Cabot Oil & Gas Announces Horizontal Haynesville Shale Success

HOUSTON, March 22, 2010 /PRNewswire via COMTEX/ -- Cabot Oil & Gas Corporation (NYSE: COG) today announced a successful follow-up horizontal well in the Haynesville Shale at County Line in East Texas. This marks the first Company-operated horizontal Haynesville Shale well, which was drilled in St. Augustine County, Texas. The King G.U. #1 (69 percent working interest), was completed in a 4,487-foot horizontal leg with 14 stages and is currently producing to sales at 19 Mmcf per day.

"With this confirmation of our earlier success and the significant partner activity in this area, Cabot plans to participate in up to 12 additional Haynesville wells, with varying working interests (ranging from seven to 52 percent), during 2010," said Dan O. Dinges, Chairman, President and Chief Executive Officer. "In addition to the James, Pettet and Mid-Bossier potential, Cabot's acreage seems to be positioned in a second core area for the Haynesville Shale."

Dinges added, "Currently, we are participating in the drilling of three Haynesville Shale wells with news to come on those during the second quarter."

Cabot Oil & Gas Corporation, headquartered in Houston, Texas, is a leading independent natural gas producer with its entire resource base located in the continental United States. For additional information, visit the Company's Internet homepage at www.cabotog.com.

landownerPermalink Reply by ALongview on March 23, 2010 at 10:16
When every company in the area is stating the EUR of 6.5 BCF per well I am confused as to why it matters to the investor what the IP is anyway? Add to that the very early estimates of the EUR for the Mid-Bossier coming in at 5-6 BCF per well and it seems that touting a 10 well program bringing in 60 BCF per unit would be a much better approach to pump the value of a stock. Thoughts?

Oil & Gas ProPermalink Reply by Skip Peel - Mineral Consultant on March 23, 2010 at 10:33
Correct, Alongview. However IMO reports like Cabot's are not aimed at savvy, experienced investors because as you say they are interested in EUR and near term development plans. The tenor and volume of the paid online touts must be aimed at some other potential investment demographic. One that doesn't look too closely or ask informed questions. And I wonder if the proliferation of energy-related Internet touters is driven by the demand from companies that see this as a viable means to popularize their stock. I guess it could be online ad related. Keith might have a thought in that regard. Bottom line is that the Cabot announcement is, generally speaking, more good news for that area of the Play. As long as you're not a royalty interest in this particular well.

landownerPermalink Reply by ALongview on March 23, 2010 at 10:53
Agreed. To internet touters, long term can be missed if you blink. I believe that the IP success that the Kardell experienced was "THE" contributing factor to the successful placement of the stock offering for Crimson.

landownerPermalink Reply by Spring Branch,mineral owner on March 23, 2010 at 10:53
ALongview, are you my twin brother that I never knew I had? I was just about to write the same comment until I saw that you beat me to it. It is about EUR's folks. If Petrohawk's and others restricted rate program result in higher EUR's on a per well basis, then that is a good thing. If it doesn't then flow the heck out of those wells and get most of the gas out of the ground in 5 years rather than 10 years, because of the time value of money. I see that Exco, on page 12 of its most recent presentation, indicated that the Oden 30 H-6 well appears to have a 9.5 BCF EUR based on reservoir simulation rather than the 6.6 BCF type curve. If it turns out to be so, folks.........that is something that matters way more than IP.

Oil & Gas ProPermalink Reply by Les Bamburg on March 23, 2010 at 17:05
Sorry to go against the grain but articles like this are written by financial types that probably do not have an ounce of technical experience. So they really do not have the background to say what companies are doing is a bad thing or a good thing.

It has been premature for the analysts to suggest that flowing wells at high initial rates is "damaging" the formation. The companies are the only ones that possess adequate information to make a determination of optimum flow rate and they are still trying to complete assessments based on the data to understand any differences in projected EUR's.

Most of the high rate wells were choked and had fairly high flowing pressures so no indication that an operator was not following a reasonable practice in placing the well on production. It is interesteing to note that many operators have not changed their procedures as evidenced by EnCana's recent 37 MMcfd well rate.

landownerPermalink Reply by GHart on March 23, 2010 at 18:02
Les,
Where is Encana's 37 MMcfd well? Anyone have any news on the Blackstone? I talked to an Encana landman last week, and they are coring the well and just started the horizontal kick. Anybody have any info on the cores? I suspect, based on his "off the cuff" remarks, that the drill rates through the potential zones uphole were very promising. But, being a landman, he isn't told anything of value. If that one comes in strong, do you believe it will "validate" much more southern acreage? Which right now, isn't very much in demand. The maps posted a few days ago pretty much cut off the south half of the county. I wonder if that is purely lack of data and well points or if they seem to know something else based on other data.

landownerPermalink Reply by Spring Branch,mineral owner on March 23, 2010 at 21:44
Ghart, there are many Blackstone wells. Be more specific.

Oil & Gas ProPermalink Reply by Les Bamburg on March 24, 2010 at 3:06
GHart, the 37 MMcfd well was in northwest Red River Parish.

landownerPermalink Reply by Spring Branch,mineral owner on March 23, 2010 at 21:41
Les, I thought that the whole purpose of the restricted flow rates was to stretch out the decline in bottom hole pressures........if that could be done without sacrificing total production over a designated period of time , say one year. If restricting flow rates does in fact result if longer maintenance of pressures without giving up much, if any, production over a designated period of time then the Operator would not only thoretically increase EUR's, but also put off the time before compression would become necessary. Both of these should result in more $$$ for the Operator AND the mineral owner.
Would it not be possible for Encana to announce a 37 MM IP on 24hr. test and then choke the well way back to a 16 or 18/64 choke for actual production? Not saying they are...just saying they could. I have noted that quite a few of Encana's wells have flowing pressures over 9,000 lbs.

Oil & Gas ProPermalink Reply by Les Bamburg on March 24, 2010 at 2:53
SB, as Jay said some of the operators are still experimenting so no conclusions yet on the results. Also, different approaches may be utilized in different parts of the play. It is just premature for the author to conclude the whole industry has adopted the approach or that it is absolutely proven at this point in time. The tone of the article also suggests the operators are pulling "stunts" which is unfounded. Realize the Kardell Well was operated by Devon which is one of the most experienced shale gas players.

The bottom line is - which approach will maximize the net present value and other economic indicators for the well? If restricting flow increases EUR without sacrificing the benefits of early production then that approach will probably be more widely adopted by the operators. The existence of any infrastructure capacity limits could also result in resticting initial well rates which was the case in many of EnCana's early wells.

EnCana's production curve indicated the well was being produced on a natural decline curve from the 37 MMcfd initial rate. Interestingly, EnCana did not make any news announcement concerning this well.
Permalink Reply by Buddy on March 24, 2010 at 3:12
Les B: What is the well name on the 37MMcfd well?

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