Hi
@diges121
Not exactly sure what you are asking a response to . Is it
@Richyrich's funding question? If it is then that depends on the final equity mix for Rangers and what the available equity will be. We know the cost will be similar to the Jewell well, as per the Rangers AFE which I posted a month or so back. Assuming SHE want to participate and will be invited to participate along similar lines to Jewell then it would seem pretty obvious what needs to happen .
Confirmation of SHE participation in Rangers is pretty well certainly predicated on a CR . SHE participation in Rangers IMO would be seen as a big positive for both companies , as that would mean by December 21 -February 22 when Rangers would start producing, both would have production net to their respective WI's if both wells IP at the base 1300 BOEPD at 900-1000 BOEPD, and obviously higher if the IP rates are conservative. BRK should be full funded or close to being fully funded under a SHE participation scenario, especially if the oppies continue to be converted.
Talking about production, one aspect the needs to be kept in mind is these wells once they start production are highly productive initially, but have a serious steep decline. This initial "flush" production lasts 1-3 months and then the declines can be ~50+% per year. A rule of thumb for a typical fracked horizontal well in the area is that it produces 40-50% of total reserves in the first 2 years of a typical 25 year life. The oil decline rate is much greater than that of the gas and the associated NGLs.
The rapid early production rate and decline may seem a serious issue, but actually works for the producer because the faster you get your money back early on, the sooner you can reinvest for growth..... and for a company like BRK, where production revenue is not the only string to the bow, the higher the NPV10 of the proven undeveloped reserves which they can sell without spending drilling capital. This is the defining business model feature which differentiates BRK from any other oiler listed on the ASX.
For those that haven't looked at the Jewell type curve closely, or don't understand what information glean from it, you can work out what the predicted production for oil and gas will be going forward from production start up.
The start date of production from the above graph was March/ April 2020 ( they haven't bothered to change the dates on the graph for some reason) .
At start date, the graph shows oil flowing at 800 BOPD and gas at 3 MMCFGPD. By end December 2020, 8-9 months later, the production rate is modelled to be just under 300BOPD and the gas rate at ~2.6 MMCFGPD. One year later at end 2021, the rate is modelled to be 110-120 BOPD and 2MMCFGPD and at end 2022, the predicted production is ~ 71 BOPD and 1.6-1.7 MMCFGPD. ( note, obviously, these are the dates on the graph and not the predicted rates / dates for the current well as production start will have move back 18 months to start Aug 2021)
So you can see the significant decline rates, especially for the oil stream which is why getting the timing right for commodity prices for the flush production is very important in regards to well payback, potentially even more important than initial production rates. Another point to note is NGL production is related to the gas flow, so THAT material source of revenue will decline at a much slower rate than the oil. Also note that after year 4, when oil production is ~53 BOPD and declined over 93%, it declines by 44% to 30 BOPD over the next 4 years, so the longer the well produces the decline rate decreases.
As more wells are drilled and start to produce, the cumulative effect of new production vs decline rate mean that there begins to build up a foundation of long term, low decline but low rate production which forms a annuity style revenue base that is highly profitable as the cash production cost is usually in the order or US$5-8 per BOE.
Despite any steep decline rate, the most important financial marker, investment criteria for BRK is the time it takes for the well to payout, which is the point where all the capital paid to drill the well has been recouped . BRK typically base their investment on a 24-30 month payout period but the current prices and projected productivity mean that Jewell should payout in roughly half that period, which will be a brilliant outcome for all stakeholders. After the well pays out, the cash generated is real free cash which will continue to build over time as more wells are drilled, put on production and then payout.
After discussion with management at the AGM, it is pretty apparent that BRK are aiming to have their cake and eat it. To that effect, ideally, out of the 20 well development program, they would drill the initial 3 wells in the DSU's. This will have the effect of proving up the prospective resource into a PDP ( proven developed producing ) reserve in the Sycamore formation , and a PUD ( proven undeveloped) reserve in the Sycamore and Woodford formations. It would mean these reserves become HBP ( held by production) which means those DSU leases do not expire until production ceases . That means there is no further stop watch ticking to mandate further drilling in those DSU's which allows BRK maximum flexibility in monetising those reserves.
Why is this important?. The Sycamore and Woodford are discrete hydrocarbon formations, where the Woodford is a shale and is the source rock for the Sycamore limestone which lays immediately above. As both zones are discreate and now HBP, BRK is able to " partition" the reserves and chose to develop the Sycamore formation PUD's for production revenue, and sell the Woodford PUD's to any party who wants to develop those reserves. There is a major Woodford producer that is an expert in developing that particular zone
...
The cash from any sale of the Woodford PUD's should be materially more than the expense to drill the remaining 5-6 Sycamore development wells and leave a significant growing pile of cash for re-investment, or dare to say it, return some to shareholders.
Cheers
Dan
(20min delay)