This Company Is Dominating the Bakken
Aug 19th 2013 11:30AM
Updated Aug 19th 2013 11:32AM
While it might only be the third-largest driller in North Dakota, Hess has drilled 18 of the 50 top producing wells in the Bakken region over the past two years. The company is focusing on three areas to drive its overall Bakken performance: well costs, productivity, and price realization. This should enable the company to deliver superior returns.
Looking at the numbers, it is the well costs and productivity numbers that are really driving the company's gains. For example, the company has been able to get its well costs down 28% over the past year. This has enabled Hess to drill a Bakken well for about $8.4 million as the effects of pad drilling start taking hold. While multi-well pad drilling can make production lumpy, the cost savings really can drive returns.
Take Continental Resources , for example. The company is using efficiencies such as multi-well pad drilling to take its well costs lower. The company is now targeting costs below $8 million before the end of the year, which is a nice savings from last year's costs of $9.2 million. The move not only saves money, but also time -- Continental can save 73 drilling days, which is 36% faster, on a six-well pad. Finally, the rate of return, by shaving a million dollars off of well costs, improves from 50% to 60% at current oil prices, which really adds up.
The Bakken can still produce solid returns even with elevated well costs. Kodiak Oil & Gas needs about $10 million to drill each of its Bakken wells; however, it can still deliver an internal rate of return of 57% as long as oil stays above $95 per barrel, thanks to higher estimated ultimate recoveries at its wells. Like Continental, it has worked at getting its average drilling days down, dropping from 32 to 17 days since 2011.
By dropping well costs producers can continue growing at least at the same pace, but at a reduced cost. A good example of this is seen at Oasis Petroleum . Last year the company spent just over a billion dollars to drill 105.6 total net wells. This year, however, the plan is to spend just $897 million to drill roughly the same number of wells. That's a savings of $111 million, which is a lot of money that can be used to drive future returns for investors.
If the performance of its peers is any indication, Hess' performance in the play should only improve as it continues to optimize. In addition to moving to pad drilling, the company is also conducting test programs to optimize well spacing as well as its completion techniques. This can also have a very positive future effect on its production.
Halcon Resources has seen dramatic improvements in its results as it's focused on improving its well performance. In fact, it holds the recent record initial production rate of 3,317 barrels of oil per day on a Bakken well. Overall, its new techniques have driven a 120% increase in the average initial production rate versus its previous completion method.
What this means for Hess investors is twofold. First, the company still has the potential to improve its already stellar performance in the play. At the same time, its competitors are working hard to also improve, meaning that it needs to continue to work hard to maintain its dominance. There are a lot of positive catalysts for the stock, which should lead to solid returns for investors.
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The article This Company Is Dominating the Bakken originally appeared on Fool.com.Fool contributor Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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