Covid is less of an issue for the USA because they work through it. DP said as far as the yanks are concerned " there are two types of people, those that have had Covid and those that are going to get it!"
The main supply issue for BRK was the casing steel , both cost and availability but BM solved that by commencing the procurement very early on in the preparation to drill Rangers.
As to why BRK are spending $ 10 million per well if the land is worth north of US$200 million?...Because they need to drill one well in each of the three DSU’s to book all the reserves. Once each of the three initial wells are on production, the DSU acreage and reserves , most importantly the PUDs which will make up ~ 70-80% of the reserves, become HBP. From that point on, how much of the booked PUDs BRK wish to develop for themselves via spending $ 10 million per well or monetise via sale is up to them , but there are no drilling commitments to hold those acres until commercial production stops, which should be in ~20 -25 years.
Case in point, WEL had to give up ~7000 acres of their main White Hat Ranch leases because they had a continuous drilling commitment of drilling well every 120 days on their non HBP acreage. Their wells are vertical so their DSU's are ~80 acres in area and despite drilling a highly successful well in mid 2021 which IP24 ~400 BOPD, they still decided to let the non HBP acreage go. Despite drilling numerous wells over the last 10+ years , their HBP acreage was only 459 acres. BRK will hold the Jewell (880 acres), Rangers( originally 640 but now 960 acres ) and Flames ( 960 acres) at an average 80-85% WI interest with only 3 wells.
As to the value of the acreage, the main issue for me is the company doesn't make it easy to value the current asset base.
We know the asset base has a NPV value based on the value of the reserves derived from the future income of that reserve based on todays commodity prices discounted by 8-10% as a typical measure.
The problem is what are the actual reserves and therefore how to value them ? As discussed previously the way BRK treat the resource is quite confusing IMO. Their 11.6 MMBOE resource that will become a proven reserve once the three wells are drilled is NET to BRK, AFTER royalties and the BM back in are taken out, but BEFORE NGLs are extracted. If you just allocate the reserves to the BRK WI BEFORE royalties and the BM back in are excluded, and add in the NGL’s contained in the raw gas, the reserve attributable to the BRK WI is closer to 25 MMBOE.
In a nutshell, I would prefer BRK to say:
" there are ~26.4 MMBOE of oil and raw gas reserves held within our 3 DSu's on a 100% basis. WE assume the average BRK WI is 80%, BRK have a 2 stream reserve of oil and natural gas attributable to our WI of of 21.12 MMBOE made up of 6.97 million barrels oil and 84.74 BCF gas"
If they want to correlate that reserve to a net economic reserve attributable to BRK they could add
" After we subtract royalties and the Black Mesa back in we calculate our 2 stream reserve net to BRK is 11.6 MMBOE made up of 3.84 Million barrels oil and 46.6 BCF gas."
But that still doesn't take the NGL's, the third stream into account. The raw natural gas reserve contains ~120 barrels per MMCFG which needs to be extracted at the third party gas plant. When this occurs there will be a gas volume shrinkage of ~40% .
To complete the picture and correlate the reserves they could say
" our total 3 stream GROSS reserve prior to taking royalties and the Black Mesa back in are 6.97 million barrels oil, 10.04 million barrel NGL's, and 50.55 BCF ( 8.43 MMBOE) or 25.43 MMBOE."
and after accounting for royalties and the Black Mesa back in
"our total 3 stream NET reserve of Oil, NGL liquids and dry gas is 3.8 Million barrels oil, 5.52 million barrels NGl's and 27. 8 BCF or ( 4.6 MMBOE) or 14 MMBOE"
As to what what those NPV per BOE would be? @TheProfessional has done a brilliant model of the NPV 8 of the Jewell, at lower oil and gas prices compared to where we are now. These have the NGL volume included so I would categorise his model to fit the 25 MMBOE reserve. He also subtracts royalties, all costs including production, drilling, royalties , taxes and takes the BM back into account, therefore providing the only true NPV analysis of the BRK reserve on a per well basis.
I would use his calculations as a guide to get a handle on what the total NPV8 would be for the entire SWISH reserve and use the 25 MMBOE number....ie, extrapolate his NPV per well to a NPV per barrel and then multiply that by 25 MMBOE to get a discounted NPV for the SWISH .
Having said that, also bearing in mind that 25 MMBOE number does not take into consideration the reserves held within the additional Rangers 320 acre DSU which effectively increases the SWISH reserve by 13%, so therefore I would add 13% to the value as well.
This post can be seen to be a rather confusing but unfortunately IMO the 11.6 MMBOE net economic reserve BRK espouse IS the cause of the confusion and why valuing this company as it will stand AFTER Flames is drilled and on production is so difficult. I can see why BRK do it this way because it is a true economic reserve, but without the explanation of exactly what it means, how they get to that number and why if you use that number, you would need to attribute a NPV10 per barrel close to $20-25 ( which most would say is way too high because no one ever pays that much ) as 45% of the cost value ( BOE ) have been taken out.
"My point is, sometimes you are too invested in not being wrong. Like this crap about waiting for the quarterly report to show revenue and " wake the market up" is utter nonsense. If you are of the opinion that we are valued at half of what our MC should be currently , and you can't explain why we aren't with something other than cap raise, traders, bots and unicorns, then that ain't investing. It's just gambling"
Cheers
Dan
BRK Price at posting:
2.0¢ Sentiment: Buy Disclosure: Held
(20min delay)