Good announcement in terms of a new source of production and cashflow.
To be clear, the 20.9 % is the sum of the WI of each well. It does not mean BRK have a 20.9 WI in the DSU. Therefore the cumulative WI over 7 wells implies a ~3% WI interest of each well before royalties. So ~3% is the DSU WI before royalties.
The cumulative Net Revenue Interest (NRI) is 15.7% which means the royalty rate is ~25% .. 15.7/20.9 =~0.75.
That means the NRI per well is an average~2.25%.
So BRK either already had that 3% WI when they participated in the first Gapstow well, but only wanted to participate at the 0.44% level to get access to the initial data, or they managed to pick up more acreage after the initial well was drilled, or a few WI holders who participated in the first well didn't want to stump up the cash for the FFD and took the royalty option . CLR may have had a high enough WI and were happy for other WI partners to take over the funding gap allowing BRK to increase it's participation.....Not a big deal but just a point of interest.
To calculate the net revenue we already know that BRK's wells current wells produce at a similar liquids ratio of ~70%, which is typically 40% oil, 30% NGl's and 30% shrunk gas. BRK guided in the quarterly that the current return is ~US$40 per BOE, ( it's been a while so I'll write up how the BOE price is calculated) and that production costs are ~US$9-10 per BOE. So using the current price regime, we can see that BRK nets ~US$30 per BOE into its bank account . To also be clear, the 150 BOEPD number is net production to BRK after royalties
If the production was steady at 150 BOEPD over the 2 year period that means a 2 year production of ~110,000 BOE. We can then calculate that the net cash flow would be 150 x US$30 x 365 x 2 = US$3.258 million. That would imply a payout period of ~1.5 years, roughly speaking.
Some points to consider.
1) The 150 BOEPD is a 2 year average rate, that means the average production in the first year will be greater than the 150, and lower in the second year. The wells in SWISH typically decline 40-50% in the first year, and 30-40% in the second year in a hyperbolic decline curve which then becomes more a straight line logarithmic decline. Based on the current information it is hard to determine what the start point production will be but I would guestimate production in the first year would be the first year ~60% of the total 2 year production or ~66,000 BOE and ~44,000 BOE in the second year. So based on that the net revenue should be close to US$2 million in the first year and just over US$ 1.3 million in the second year.
2) This is a small but meaning full increase in the reserve position , over and above the latest independent reserve report. Again is it difficult to guestimate what the increase in reserves would be taking into account the wells are longer laterals ( 12000-14000 ft) vs the 10,000 ft FMDP ( Rocket and Iginla) wells. But roughly extrapolating a 20% increase in well EUR from below:
The net reserve increase would be ~ 270,000
Reserve calculation would be [ 2 x (1.98 x 1.2) + 5 x ( 1.18 x 1.2) ] x 2.25% = [2x(2.376) + 5x(1.42)] x 2.25%
or 11.83 million BOE x 2.25% = 266,ooo (+/- a 10% margin for the very rough estimates.)
Regardless, this is a ~14% increase to the PDP reserve at end 2023 of 1.769 million BOE and will replace ~ 20 - 30% of the expected 2024 production of ~ 900,000 BOE ( FMDP + current production)
3) This is an example of BRK using it's non operated position to boost production by participating in 3rd party operated FFD. If you look through the well counts in the quarterlies you can see it has already done so in the Centaur, Ringer Ranch, Biffle and Roser locations, but at much smaller WI levels.
Currently, there aren't many existing DSU's where they hold a significant WI outside SWISH, except the Bullard DSU, where they hold just over 20% in this Garvin multi unit operated by Rimrock. the Bullard DSU represents the majority of the 305 net Garvin acres .
The initial Bullard Woodford well was drilled back in 2018 where BRK participated at it's full WI. It was highly successful
BRK sold ~15% of the well to SHE in late 2020 . For some reason Rimrock have not proceeded to FFD at Bullard as far as I am aware so at this stage I don't think there are any more DSU's where BRK could repeat a non operated development at the Gapstow WI level.
Having said that, BRK are always on the look out for new opportunities and we don't know what may be around the corner ( except another 16 operated wells after the FMDP that is).
Needing significant cash to fund the FFD at SWISH and being able to grab some of the many opportunities they will be presented with over the next few years is why the company has to be prudent with it's capital allocation.
Having said that, a 10% BB is equivalent to a 10% increase metrics on a per share basis.... permanently, so IMO it is very important buy backs become part of the BRK DNA which will boost the per share returns of future increases in production, revenue and profit.
Cheers
Dan
PS BOE price calculation.
To calculate the price per BOE the 3 streams of oil, NGL and gas you need to know the total BOE production, the % of each stream and the individual price of each stream. Once you have that you can calculate the BOE price.
If you don't have t a BOE flow for gas, but have a gas flow rate in MMCF, you need to convert that flow to BOE.
The conversion is 6 thousand cubic feet gas( 6 mcf) = 1 BOE of gas.
So if gas is selling at US$3 per mcf, then 1 BOE gas sells at 6x $3= US$18 per BOE
Currently the price regime is:
1 barrel oil is ~US$ 80
1 barrel NGL is ~US$18
1 MCF gas is ~US$2 or US$12 per BOE.
If the current BOE production for BRK is 40% oil, 30% NGL and 30% gas , then 1 BOE works out to be
oil component = US$80 x 0.4 = US$32
NGL component =US$ 18 x 0.3= US$5.4
gas component = US$ 12 x o.3 = US$ 3.6
giving a total price of US$ 41 per BOE.
NGL prices have been selling at US$ 30 + typically so the current price is very low. If NGL return to that historic average price, it will add another US$3.6 to the BOE price, with no real effect on the ~US $ 10 per BOE cost, which would raise the net return per BOE from ~US$30 by over 10%.
BRK Price at posting:
1.3¢ Sentiment: Buy Disclosure: Held
(20min delay)