Wednesday, April 4, 2012

GMX Resources ($GMXR) and the Not Very Informative Press Release

After the market close today, GMXR announced that it had

"successfully drilled and completed its fourth operated horizontal Bakken well, the Lange 11-30-1H, 89% working interest, located in Sections 30&31 Township 147N Range 99W in McKenzie County, North Dakota. The Lange 11-30-1H was drilled to a measured depth of 20,519' with a lateral length of 9,348'. It was completed as a 32 stage frac Middle Bakken producer achieving a peak rate of 2,549 boepd @1,500 psi flowing casing pressure."
What you will often find with E&P companies is that they will announce a production metric on a new well that tells you almost nothing. With production rates, it is important to know over what time period the test took place. This well is still on confidential status in North Dakota and the company isn't saying what time period that rate was over, what the decline rate was, etc.

They are also reporting a "barrel of oil equivalent" number and not giving the breakdown between oil, NGLs, and natural gas. A guy actually called investor relations today and asked for the breakdown: no comment. He also asked whether or not the well is connected to a pipeline so that the natural gas can be sold. Again, no comment. I suspect it is being flared like other North Dakota wells.

Here's why this matters. The chart below is for a well called Taboo 1-25-36H, which is operated by Slawson but where GMXR has a 25% working interest. The well announced today - the Lange #11-30-1H - "is a direct offset and located 3,000 feet east of the Taboo" according to the company. So the Taboo well performance should be useful in thinking about the Lange.


The blue bar is the "initial production" in "barrels of oil equivalent (BOE)" for the Taboo well that GMXR announced in February.

In theory, the initial production of 1436 BOE should equal the initial production of 1197 actual barrels of oil plus one-sixth of 838 actual MCF of gas (which were the numbers reported to the state) in order for the BOE number to be BTU-equivalent. However, the BOE number that you get if you add the state numbers is only 1337 BOE. Where are the missing 100 BOE? It could be that the "initial production" number GMXR reports and the state numbers are calculated over different periods of time. That is why it is nice when companies give details about how they calculate "initial production" numbers.

Moving on from "initial production" to ongoing monthly production is where the story gets interesting. The "actual" IP numbers shown are from the NDIC well production history website. The "average" numbers shown are calculated by dividing BBLS Oil/Days in the NDIC well production history data.

You can see that the average daily bbl production over month one was 73% less than the "initial" daily production number from the state. Precipitous production declines are characteristic of these horizontal frac wells.

So, by month three, the Taboo well seemed to be producing 325 actual barrels of oil per day. Maybe it will produce somewhere between 50,000 to 100,000 barrels during the first year. And that will be almost all of the oil it will ever produce. It is hard to see it producing enough oil, which sells at a discount in the Bakken, to equal the present value of the ~$10 million estimated well cost. In other words, it is hard to see how this well can break even.

The Lange well, announced today, has a higher IP number, although it is not really comparable to the numbers we are using for Taboo. It could be a better or worse well; we haven't been given enough information to know and it is still on "confidential status" with the state. One would think that, if there was clearly good information, the company would have released it in the press release. So, we are probably looking at another well that is borderline breakeven assuming a normal cost of capital. For GMXR, with debt trading at double digit yields, the cost of capital is much, much higher.

Ironically, the worst case for shareholders may be that GMXR drills wells that are borderline breakeven. If they were drilling clear losers (which the early wells appeared to be) they might stop. But if they drill breakeven wells, they will use up their cash right before some major debt maturities coming due. Less cash means less bargaining chips to use with bondholders, which implies a more dilutive restructuring.

6 comments:

oilandgasguy77 said...

Good luck covering your short today!

oilandgasguy77 said...

"So, by month three, the Taboo well seemed to be producing 325 actual barrels of oil per day. Maybe it will produce somewhere between 50,000 to 100,000 barrels during the first year. And that will be almost all of the oil it will ever produce. It is hard to see it producing enough oil, which sells at a discount in the Bakken, to equal the present value of the ~$10 million estimated well cost. In other words, it is hard to see how this well can break even"

Do you just think that people reading this will believe it? You actually believe that the decline curve on these wells is 1 yr? These wells will continue to produce oil for years and years. In fact many of them for 30 years!

Get your facts straight!

Stock Chump said...

The press release says the peak rate is 2538, not average production. I think you may have misread the press release.

Every time you drill a well you get better knowledge of the field and how best to drill and frack it. This is important as the well drilled was 75% better (on peak production rate).

With the price discrepancy between Nat Gas, Nat Liquids, and Crude Oil it is disappointing that the company did not release more information in the press release of the output.

Echoing oilandgasguy77 comments (but not in his negative way) After the initial decline in production, the well is very steady and should only decline 5-10% of previous year supply (ie 5% decline does not straight line decline so that the well is done in 20 years).

I have no position in the company.

wildcat said...
This comment has been removed by the author.
wildcat said...

Looks like good news for longs, but I'm not sure why the company doesn't just put out all the good news at once. They would help themselves if they were more clear, for instance:

They released the "peak rate", is this better than a 24-hour rate? This sounds a lot better, and they should be clear about how much better it is.

Also, they made no mention of frac balls with this well. In previous wells they have had big production issues because so many of the frac balls are still stuck downhole (I beleive GMXR is building a fleet of workover rigs to get the balls out of the hole, which should lead to huge production!).

My question is, why didn't they release how many balls are still stuck in the Lange 11-30-1H? If they still have most of their balls stuck in the hole this "peak rate" could turn out to be conservative. I can't wait till they get one of the workover rigs out to the Lange and really work it over. I believe they can drill the balls out of the hole with a downhole mud-motor.

As another astute commentor posted, every time you drilla well the knowledge increases, and I'm sure its the same for workovers. By this point Ken Kenworthy must be so good at working the downhole mudmotor and getting his balls out of the hole that production could probably double or triple once he gets them out!

I have no position in the stock

Anonymous said...

Apparently, there is a special grommet that you can put on your tool to help prevent your balls from getting stuck in the hole.