Stratas Advisors is a Hart Energy company.
Tight oil production in the Permian Basin continues to grow as operators consolidate acreage positions and drill horizontal wells to develop stacked pay zones.
In 2014, there were multiple acquisitions and divestitures in the basin. Using Stratas Advisors’ North American Shale methodology and proprietary Workbench tool, we took a closer look at Encana Corp.’s acquisition of Athlon Energy’s Midland Basin assets to substantiate the value in the transaction.
On September 29, 2014, Encana and Athlon announced their merger agreement for Encana to acquire all of the issued and outstanding shares of Athlon for US$5.93 billion and $1.15 billion of senior debt, for a total value of $7.08 billion.
The transaction was expected to close by year-end 2014, adding 168,000 gross (140,000 net) acres in the Midland Basin to Encana’s portfolio.
The acreage also has 1,121 vertical and 17 horizontal producing wells with current production of 30,000 barrels of oil equivalent per day (boe/d), about 60% oil, 20% NGL and 20% natural gas.
We analyzed Athlon’s historical well production data and generated type curves to represent the company’s vertical and horizontal wells.
Well productivity improved as Athlon transitioned from vertical to horizontal well development in the play. We estimate that the average EUR of vertical wells drilled since 2011 is 134 Mboe.
The recent horizontal wells average 717 Mboe—about a fivefold increase.
The average type curves were then used to calculate half-cycle economics for both vertical and horizontal composite type curves with a standard price deck of $80/bbl of oil, $37.50/bbl of NGL and $4/Mcf of gas, and a discount rate of 7.5%. We estimate that the 134 Mboe vertical wells, at a cost of $1.9 million each, generate an after-tax net present value (NPV) of $0.09 million and a breakeven oil price of $75.04/bbl.
The average gas-oil ratio (GOR) of the historical vertical wells analyzed was 3,086, with hydrocarbon splits of 66% oil, 16% NGL and 18% dry gas.
The economics of the composite horizontal well using a cost of $8 million and an average GOR of 1,774 yielded an after-tax NPV of $9.29 million and a breakeven oil price of $34.42/bbl. Athlon’s well economics have significantly improved with horizontal development.
We also calculated well economics for Encana’s horizontal wells by adding the acquisition cost on a per-well basis. We calculated Encana’s NPV from the existing 1,121 vertical and 17 horizontal producing wells and subtracted from the total Encana’s acquisition cost.
Using 5,000 potential horizontal drilling locations (as reported by Encana), this cost would add $1.4 million per well to the cost of future wells. If we assume only 1,842 potential horizontal drilling locations (as reported by Athlon), the cost would add $3.8 million per well to the future well cost.
We believe that Encana will shift from vertical to horizontal development in the acquired assets. Even accounting for the acquisition cost, Encana’s horizontal wells are economic, assuming future wells are as prolific as the recent horizontal wells.
Our analysis predicts $7.08 million after-tax NPV for a well cost of $11.8 million and $8.47 million after-tax NPV for a well cost of $9.4 million. The well results and economic analysis support that the Permian asset acquisition can provide additional value to Encana’s liquids-rich asset portfolio as it continues to transition away from natural gas.
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