What's so important about capital efficiency anyway?? Well I'll try and give the long term view as to what this tells you about the future. First lets take a stab at what the Capital Efficiency number calculates out to.
I raised "single well economics" slides in company presentations as slides to be wary of. I say this because they don't apply to the "reportable" data that company's are held accountable to (such as the SEC). This is why I like to see the numbers at the corporate level. Doesn't happen very often.
Taking now SEA, I presented that there exists some challenge to getting a corporate level view. If you just take the single well view we can estimate (or calculate precisely) Capital Efficiency.
Slide 15 of the CR presentation has the McMullen County SEA Type Curve. They note the EUR as 476MBOE and the Capex as $5.67M. The company could provide the IP365 for the type curve we would divide that number into the Capex to get a "precise" number for the Single Well Capital Efficiency.
Since I don't have their type curve we could either estimate from the Cumulative BO graph at 365 days and then uplift by oil% (i.e. 82%) which gets me about 140MBO / 82% = 170MBOE = 466 boepd
Using that method the Capital efficiency is estimated at $12,168/Boepd
Adjusting to new estimated Capex per well of $4.6M/well then CE = $9,871/Boepd (assuming EUR remains the same).
If you can recall the publication I posted regarding "Eagleford Shale Reality Check" that quoted
"...The average well declines 77% in its first three years and between 43% and 48% of a well’s ultimate recovery, assuming a 25-year life, is produced in the first three years....". McMullen County avg is 79%.
Using the above and taking the high end 48% then first three years would produce ~230 MBOE. Also references 77% decline in those first 3 years so we can distribute this ~ as 140MBOE first yr, 60MBOE and 30MBOE.
This method puts the Capital Efficiency at ~ $11,980/Boepd at the reduced $4.6M well cost.
Thus we can reasonably estimate "single well economics" for Capital Efficiency as between $10K-$12K (which is a pretty good number)
So far you can see the obvious - which is as Capex costs come down and technical innovations improve the EUR (both in total and also the IP365) that the Capital Efficiency number comes down .... and in some cases quite quickly. Especially so when applied to single well economics.
Lets now make the statement that the 7,900 boepd production of 2015 is the "Status Quo" level that SEA needs to maintain in 2016 and then also in 2017. That means SEA has neither shrunk or grown (in terms of production) but financially things will change greatly (e.g. Revenue, net profit, etc).
By my estimates (which I think are reasonable and conform with company and 3rd party data) in 2016 as a whole (so including acquisition and all Capex) SEA will spend $66.4M. The question is how much production will be added. This I don't know for sure and can only estimate (SEA will have this number at their fingertips) as it requires projecting the production from the existing wells in production at end of 2015 for total 2016. I did this in the post at the very beginning which took the SEA reported exit rate of production Dec'15 and applied what I think is a reasonable decline to arrive at my end rate for Dec'16 (so this is no new wells).
That decline is 7,801 - 4,230 boepd = 3,571 boepd for 2016 that have to be "replaced" to remain at the "Status Quo" level. That implies corporate level Capital Efficiency of ~ $18,595 which of course is not reliable. Why? Well because the acquisition distorts this and we really want to discover the 2016 D&C capital efficiency. So if we back out the acquisition capital cost we get Capital Efficiency$14,115. This is also a "high number"
What's happening. Why isn't this closer to the "single well economics" slide estimate. Well its a function of timing. Most of SEA wells are being D&C in Q3 and Q4 and so only getting a fraction of the IP365 against the full cost of Capital. So to be more realistic you would have to "normalize" somehow the capital cost against the days on production. As $30.6M is being spent in H2, I'll simply make a bit of an arbitrary reduction of 50% (or $15.4M) which puts the "adjusted Capex" to $35M for Capital Efficiency purposes and we now come up with
"Adjusted Capital Efficiency" ~ $9,800/BOE (which should make y'all feel pretty good).
Anyone still reading??
With SEA exiting 2016 at the Status Qqo level of 7,900 boepd and if we believe $10-$12K Boepd for Capital Efficiency is reasonable the question to answer and be cognizant of is
"What is the Capital Budget necessary in 2017 to maintain the level of production at 7,900 boepd?
We first need an estimate of decline - don't forget SEA has a lot of wells (+/- 13) that will be in their first year of production so SEA as a company will have a high overall boepd decline percentage. So we will do a little sensitivity matrix to estimate the Capex required in 2017
View attachment 206099
So lets go with a conservative 4,000 boepd of decline (i.e the amount production will decline by in 2017 if SEA invest $0 into its D&C program which is approx 50%) and Capital Efficiency at the $10,000 boepd rate, that projects SEA will need a $40M Capex budget in 2017.
If we see SEA improving on single well costs to say $4M and improving EUR to say ~650MBOE which implies IP365 of ~500 boepd then SEA would be in the $8K range which is very very good.
All well and good, but will SEA have $40M of discretionary cash flow in 2017?
Of course that is highly dependent on oil price and the success of 2016. Assuming ja $55 WTI avg for 2017 and a flat avg of 7,900 boepd each Qtr, I have SEA generating of the order of $20M cash each Qtr in 2017 of which you would be subtracting $10M for Capex, leaving actual, highly desirable free cash flow of $10M/Qtr on a flat basis. Expect that would be spent on debt reduction.
That was for the benefit of long term value investors on the basis of fundamentals. Lot's of assumptions and variables contained therein and I don't have a crystal ball on oil price .... but it does show that ~$55 seems to be where it needs to be.
GFTA
