Just to recap the Orion opportunity
I have added the names to the locations of our current DSU's to show where the first 80 HBP acres have been purchased ( Jewell ). In the red brush tip like locations I have added the sections where BRK hold non operated leases, or no longer hold positions having horse traded them. In regards to the first acquisition ,to be clear, the JV owns 43.75% of those 80 acres but through Black Mesa, operate and control those 80 HBP acres.
For the acquisition of the leases within the SWISH project, BM/ BRK have a data set of the area which they analysed and interpreted to find the hot spots for the Sycamore and Woodford formations. This analysis lead to their picking up the leases, forming 3 DSU's which they chose as best locations and horsetrading the rest.
View attachment 2334941You can be pretty sure that BRK will be purchasing as many HBP acres in their 3 DSU's thereby consolidating their control of those DSU's, targeting HBP acres in the red brush tip sections in the second instance, as well as picking up opportunities in any of the 432 (36 sections in each of the 12 townships) sections that meet their benchmarks.
One has to appreciate that each deal will have the same outcome, HBP acreage acquisition, production and PDP reserve increase leading to and NPV increase in that acreage. What will differ will be the acquisition approach. Sometimes the JV will have to purchase the acreage and spend cash on a workover to re-establish or increase production as in the first deal. Other times, they may not need to buy the acreage as such, but just takeover the lease because the existing holder is facing well abandonment costs (as the well is almost depleted ) they would rather not pay ( can be up to $50,000) and the original holder will be given a portion of the work over cashflow when/ if the price of gas reaches a certain level eg US 4 per mcf . The well abandonment costs will not be an issue for BRK because once the well is worked over, production should continue for many years by which time the acreage would have been developed and or sold as per the business model.
Securing shallow horizon workover cashflow is beneficial, especially when the payback benchmark is typically 2 years, but may be up to 4-5 years if the underlying Sycamore/ woodford potential is outstanding. This is actually the main game, as any HBP leases purchased for the Orion project will need to have the Sycamore/ Woodford PUD potential otherwise they won't be persued.
Most of the work over production will come from shallower, historically vertically drilled wells, this PDP reserve will be separate and in addition to the Sycamore and Woodford formations which will need to be drilled by horizontal wells. For the first deal, the Newberry well does produce from the Sycamore formation but the Jewell well will be targeting up dip and undrained attic reserves.
The beauty of this strategy is the fact that their dollar effectively gets them multiple bites of the cherry, and they are paying a much lower price in the mix.
Looking at the first deal in detail, and comparing the process in acquiring acreage to what BRK/ BM were traditionally doing, the advantages of using this strategy become apparent. Previously, after analysing the Sycamore / Woodford potential of the acreage under consideration, BRK would have to find all the lease holders through looking at county records, ( there could be tens to hundreds) offer them royalty and cash bonuses for a typical three year lease. For example, the terms could be US$1-3000 and acre and a 18% royalty. For an 80 acre tract that would cost US$ 80,000- 240,000 and to retain the acreage past 3 years ( without exercising an option) they would have to form a DSU as operators, or agree to participate in another operators DSU and pay their share of a horizontal well which needs to produce to have those acres HBP. If those 80 acres were 6.25% of a 1280 acre DSU, BRK would have to spend another $500,000 for their equity to drill a well to get access to cashflow and HBP status.
Now , with the first Orion deal, as those 80 acres are part of a vertical well drilling unit ( all vertical or horizontal wells need a drilling unit but the vertical well units are smaller because of the smaller drainage area) the acreage has already been pooled so there typically a few parties involved in the production. The cost of the vertical well workover in increasing production is a fraction of drilling a horizontal well. The acreage is already HBP, which means ALL the hydrocarbon horizons are captured under those 80 acres so there is no further leasing requirement to access the Sycamore/ Woodford horizons or a timeframe needed to drill the horizontal well .
It cost the Orion JV roughly US$ 80,000 to buy 43.75% of the 80 acre drilling unit and US$25,000 to increase production 7 fold. Back of the envelope calculations show that at current oil and gas prices, the gross cashflow to the JV is only small, ~ US$20,000 per year with net probably half of that, which means a 2 -2.5 year payback for the workover, after which the net cashflow decreases the acquisition costs. The well has a tiny decline curve so will produce for many years to come, and as mentioned the acres do not expire as long as the well produces, thus no more drilling or leasing time commitments and therefore BRK has complete flexibility going forward.
It is obvious that the more acreage BRK is able to acquire this way the better. They are able to take advantage of these opportunities at this time because their business model is not production based... where the underlying Sycamore/ Woodford potential warrants it, for a significant discount to the previous process, they will be able to acquire premium SWISH acres, without the stopwatch running on leasing and drilling. In addition, and this is where the extra bites of the cheery comes in, they will be able to generate long term production and PDP reserves , generally in extra shallower horizons which on an individual deal basis may be small, but collectively can produce a meaningful impact for the company.
Apologies for the long winded post, but again the market has not picked up on the significance of this deal ( what else is new)...there are literally hundreds of vertical wells within their purview and if they are able to secure another 10-20 such deals, the impact on the value ( rather than the share price) of the company cannot be underestimated.
Cheers
Dan
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