In all honesty the 11.6 MMBOE resource number has been bugging me for a long time, it just seems too small relative to BRK's stated rules of thumb for economic development and target barrels of reserve per 640 acre DSU.
So, I just wanted to have a discussion regarding the 11.6 MMBOE resource BRK announced for their interest in the three operated SWISH DSU's, and as an exercise I would like to attempt to quantify to where the disparity may lay using the previous announcements relating to the SWISH acreage as a guide.
The 11.6 MMBOE number is made up of 3.839 million barrels oil and 46.6 Billion cubic feet of gas.
It is important to be aware of the parameters that come into the 11.6 MMBOE number. Referring to the points in the notes from the announcement we see that amongst a number of points, that reserve reserve figure:
1) Is reported according to the BRK economic interest in the resources and NET of royalties ( iii)
2) Is based on BRK achieving a 90% WI in each of the DSU's ( ix)
3) The reserve is un-risked so no discovery or development adjustment is applied (xi,xii)
The reserve will be developed via a 21 well program, with the Jewell being the first of 7 Sycamore wells along with 14 Woodford wells.
For the discussion some assumptions need to be factored in as per the following.
What still isn't clear is the final pooling in the DSU's . However at this stage for Jewell DSU ( not the well) with the original leaseholder participation it seems that the BRK WI interest will be 87-88% which is pretty close to the 90% so at least for Jewell that appears to be an accurate BRK estimation.
The following is the LIGHTBULB moment where IMO the reason for the 11.6 MMBOE number is way too small!
It is in regards to the resource being reported according to the company's Economic Interest AND net of royalties as this adds some complexity. Firstly, (the royalty burden varies from 12.5%-25% on individual leases) but historically the pooling weighted average seems to be ~20% . The Economic Interest is different to the Working Interest as the BRK WI in the Jewell well and DSU will change once Black Mesa 25% back is activated The back in occurs once BRK recoups all funds expended (leasing, GG&A, drilling) on each project . For ease of calculation I will assume the back in applies immediately. It is the combination of these two factors which IMO causes the reserves issue ( for me).
The aim of this exercise is to calculate the BOE reserve attributable to the BRK WI before royalties and the Black Mesa back in using the gross acreage with the 3 DSU's as the template and reconcile that with other information.
Most resources have a risk discount applied to discovery and development, however in BRK's case, the nature of these resources effectively being 2P reserves and close to gas pipelines and refineries , the maximum discount to discovery and development wouldn't be more that 5% each so I am comfortable with the company not risking them at all.
The Calculation....Working Backwards.
The gross DSU's acreage is 880 acres for Jewell, 640 acres for Rangers and 960 acres for Flames or a total of 2480 acres. Taking into account BRK having a ~90% WI in the acreage as a whole then that 11.6 MMBOE is captured by ~2232 net BRK acres.
But by working back the 20% net royalty and the 25% Black Mesa back in, the reserve attributable to that 90% WI would actually be 11.6/ 0.8x0.75 or 19.33 MMBOE or 21.46 MMBOE on a 100% basis for the 3 DSU at 2480 acres.
Thus for a 640acre typical single unit DSU the SWISH AOI has an un-risked reserve on a 100% basis of 5.53 MMBOE for both the Sycamore and Woodford benches . Therefore simply put, the 880 acre Jewell DSU reserve should be 7.6 MMBOE, the Rangers 640 acre DSU reserve should be 5.53 MMBOE and the 96o acre Flames DSU reserve should be 8.295 MMBOE.... the BRK interest would be 90% of each.
Noting that working backwords has a potential margin of error due to
1) in the gross royalty rate ( guess)
2) and applying the Black Mesa back in right from the start, rather than waiting for enough production and reserve depletion to occur before the back in actually commences.
Now, when BRK initially presented the SWISH opportunity back in March 2018, they detailed some of their background work, specifically their estimates for the Estimated petroleum in place per unit for both the Sycamore and Woodford, and they also showed their individual well EUR ( Estimated Ultimate recoveries), as per below
So for a 640 acre Unit with the SWISH AOI the petroleum in place for the Sycamore formation is estimated to be 22.5 MMBOE and the Woodford formation is estimated to hold 22 MMBOE for a total of ~44.5 million BOE in the unit.
The individual well EUR ( estimated ultimate recovery ) for a Sycamore well with a 7200 ft lateral was estimated to be 2.166 MMBOE . For a Woodford well with a shorter 4800 ft lateral, the EUR was estimated to be 1.066 MMBOE . BRK have intimated the 3 initial wells on each DSU Jewell, Rangers and Flames are Sycamore wells.
The Calculation... Working Forwards.
Using the 7 Sycamore and 14 Woodford a simple calculation using the above parameters to estimate the reserve in the 3DSu's across both benches on a 100% basis would be :
7x 2.166 + 14 x 1.066= 30.086 MMBOE un-risked on a 100% basis WI across the 2480 DSU acres, or 7.76 MMBOE per 640 acre DSU. This number appears a bit high IMO but lets keep going .
Admittedly this is very simplistic because there will be individual well variances due to geology, faults, length of laterals will be different per well, natural fractures etc... never the less we have a disparity between the 2 numbers in the order of ~30% but what this simple working out has shown two things.
1) Firstly and most importantly, because that 11.600 MMBOE number is AFTER royalty and the Black Mesa back in it actually confuses the issue as we are not talking about a BOE in ground reserve as such, but one that is practically produced, where the royalty cost and the Black Mesa back in has been taken out. It is more a TRUE VALUE reserve number but BRK haven't explained that clearly.
Had they said the reserve attributable to their ~90% WI in the DSU's was ~19.33 MMBOE before royalties and the Black Mesa back in, that would be less confusing ( but admittedly less transparent )
2) By BRK's own admission, the resource number is conservative... the most important factor being it is calculated before any of the offset wells like Flash and Courbett blowing the Jewell well type curve out of the water. If Jewell performs anything like Flash , with a higher IP and longer slower peak decline then there should be a material revision to the upside in the Jewell DSU reserves. If the Woodford wells drilled perform similar to the Courbett well, then it would not be unreasonable to expect a SWISH AOI reserve uplift heading towards the higher estimate.
Another point to consider, the potential addition of the 320 acre DSU Rangers extension, which using the CONSERVATIVE BRK figures should add ~ 2.77 MMBOE to the Rangers reserve on a 100% basis ( before royalties and the BM back in ) .
To recap, the 11.6 MMBOE reserve is a Economic Interest reserve, the reserve attributable to the BRK WI is more like 19-20 MMBOE ( but there is no net change in value to BRK, that will come with an increase in reserves). That increase in reserves will come from increases in acreage ( Rangers extension), better well performance ( Flash and Corbett analogues) and recalibration of the BRK calculation as compared to their conservative modelling.
Just had to get that off my chest
Cheers
Dan
PS .. note that BRK own 50% of Black Mesa, so half the back in returns to BRK, another stroke of genius by David in maximising the return to BRK.
BRK Price at posting:
2.7¢ Sentiment: Buy Disclosure: Held
)
(20min delay)