A little more than a year ago, the Powder River Basin and its various stacked pays were hotbeds of activity, an emerging horizontal sweet spot with 45 rigs running. Public E&Ps like Devon Energy Corp., Anadarko Petroleum Corp., SM Energy Co. and Chesapeake Energy Corp. were expending hundreds of millions of dollars of capital in this Wyoming play. Industry leader EOG Resources Inc. identified it as one of its most economic regions, adding to the basin’s allure.

Today, at an oil price less than half of what it was a year ago, fewer than 10 horizontal rigs remain in the play—and maybe as few as two in January, per Baker Hughes Rig Count data. However, competition for acreage remains heated, as most of it is held by legacy production with few large blocks available.

One exception to the land lockup is Devon’s recent acquisition of NewWoods Petroleum LLC, fka RKI Exploration & Production LLC, a $600-million deal for 253,000 net acres. The deal, a loud shout in a quiet room, attests to the continued value proposition of the Powder River Basin.

At the time of the announcement, in early December, Devon vice president of E&P Tony Vaughn said, “This opportunistic transaction adds scale and scope to our Powder River Basin operations, creating the largest and highest- quality acreage position in the industry. Our Powder River programs are delivering some of the best returns at Devon, and we will apply our unique basin knowledge to efficiently develop and de-risk this premium acreage position.”

At the Capital One Securities Energy Brokers Conference in December, Devon senior vice president of investor relations Howard Thill said, “When we look at this stacked, liquids-rich area, those assets are very comparable with the Delaware and the Eagle Ford assets that we already have from a return standpoint.”

According to its third-quarter report, Devon was running two rigs in Campbell County, Wyoming, but Thill did not indicate how many rigs would be working the play for the company in 2016.

SM and Anadarko had at least one rig running in the Powder through the third quarter, but it appears EOG has laid down its fleet for now. In the company’s November conference call, EOG executive vice president of exploration and production, David Trice, said, “The Powder River Basin remains a core position for EOG. Although capital spending is lower this year, we will continue to work the technical details, block up acreage and secure regulatory permits. All of this will set up the Powder River Basin as a future growth engine for EOG.”

Rig decisions

The Powder River is home to as many private operators as public ones, and a survey of several indicates that while they believe in the rock, private companies are more willing to idle rigs and wait out low oil prices for a recovery.

“We’re less focused on drilling at this point, given commodity prices and our continued pipeline of deals,” said Court Wold, finance and planning manager for Wold Energy Partners LLC, based in Denver. “We don’t think there are any formations that compete for acquisition dollars at $36 oil, so instead of putting our dollars into the ground, we’re focused on acquiring HBP acreage.”

At the beginning of 2015, Wold was adding to its operated spacing units and participating selectively as a nonoperating partner in five horizontal rigs in its core area alongside Anadarko Petroleum, SM Energy, Helis Oil & Gas LLC and Peak Energy Resources LLC. Since, four of those rigs have been laid down, and SM continues forward with one.

Similarly, long-time Powder River-player Ballard Petroleum Holdings LLC finished its 2015 drilling program in mid-December with about 20 wells drilled and completed, and doesn’t plan to initiate another well until late in the first quarter. But the Billings, Montana-based company is not going dormant in 2016.

“The plan is to balance our capex with our discretionary cash flow, which means we will be drilling some wells,” said Dave Ballard, president of Ballard. “Obviously, we’re waiting to see what happens with price, and we’ll adjust our program up or down.”

Ballard is also a nonoperating participant in wells with Peak Energy, Devon and EOG.

After dropping two rigs in March, Durango, Colorado-based Peak Energy ran one rig throughout the remainder of 2015, but “very reluctantly” let it go in December, said Peak chairman and CEO Jack Vaughn. “The $35 oil environment got us to a point where we thought we needed to stay within cash flow,” he said. “We had to make a tough business decision, so that’s what we did.”

Wyoming weather played a part in the timing. “Particularly in the wintertime, we wanted to get out of the higher operating cost environment, then be in a position where we can start back up, probably in four or five months. We’re still proving up our reserves and we have multiple development opportunities, but we hit a period where we wanted to take a breather and decide what happens next.”

Lessons learned

Vaughn’s reluctance to drop Peak’s last rig in the face of commodity price headwinds is not sentimental, but practical. “It’s not a free event,” he emphasized. “It’s going to cost us well over $1 million to release the rig.”

But lost efficiencies are even more important to him. “We’ll lose the efficiencies and teamwork we’ve been able to achieve. To get back up and start over again—I’m afraid we’ll drop down the learning curve.”

Peak maintained a rig program throughout 2015 when others were releasing rigs specifically to work on efficiencies.

“We wanted to be able to prove to ourselves and our investors that we could achieve about a 30% cost reduction,” he said. In addition to service cost cuts due to market conditions, “we also looked for procedural changes in how we were drilling and completing our wells to continue to move up the learning curve, so that regardless of what commodity prices were, those cost reductions were enduring and would last. If you’re not active in the field, you can only work on the conceptual. We’ve achieved a great deal of that.”

Peak drilled 15 wells in 2015, targeting the Parkman, Shannon and Turner formations. Among those 15 were Peak’s strongest wells to date in the Parkman and Turner formations.

“The best Turner well we’ve ever done” initially flowed more than 2,700 boe/d, and is still flowing strong, he said. It has produced more than 250,000 barrels of oil and 360 MMcf of gas in six months at a D&C cost of less than $7 million. “We think it is well north of 1 million barrels EUR,” said Vaughn.

Although these highest-performing wells are atypical, he noted the majority of the 15 were “still quite outstanding.” In addition to the more conventional sandstone targets, Peak is also evaluating the Mowry and Niobrara shales and has encountered positive results. “We drilled some very encouraging wells. That’s a result of us continuing to tweak our completion technology,” said Vaughn.

Low-hanging fruit

Ballard drilled its first horizontal well in the Powder River in 2003, and is one of the longest-term intact teams exploring in the play. “We feel like we understand the Powder as well as anybody. We really like the Powder River Basin; it suits us well,” said Ballard.

The core of Ballard Petroleum’s 56,000-acre holdings are in K-Bar Field in Campbell County, Wyoming, where it drills for Turner and Parkman pay. The company produces some 8,000 bbl/d from 60 or so operated unconventional wells.

Although not economic at today’s prices, said Ballard, “we do have one of the sweet spots where our Turner wells are the best wells in the basin.”

These wells typically post initial production rates in excess of 1,000 bbl/d and are “pretty stable.” One in particular, now in production for two years, has estimated reserves above 800,000 bbl on a one-mile lateral. “That’s the best we’ve done so far.”

The Ballard AFEs for Turner wells are just under $6.7 million, while Parkman wells are about $4.5 million.

Although Devon Energy is drilling two-mile laterals in the Parkman nearby, Ballard is hesitant to transition to two-mile laterals in the Turner—or 1,280-acre units—due to the pressure regime.

“The Turner is quite a bit more pressured; therefore it creates a bit more excitement if you run into a high-pressure fracture. We’re not sure 1,280s are the place to be in the Turner yet.”

Another reason has to do with permits on federal lands, which take about a year to obtain. “If you want to change from a one-mile to a two-mile lateral, you’re throwing away a lot of permitting time.”

The Niobrara and Mowry are also productive in K-Bar Field. “Those will be the true resource plays in this area over time,” Ballard said. “As we get a better oil price, we’ll see more wells drilled in the Niobrara and Mowry. But the lower-hanging fruit are the tight sandstones.”

HBP focus

Wold Energy participated in a total of 18 horizontal wells in 2015, all nonoperated. However, the company controls operatorship across a vast majority of its acreage in the over-pressured axis of the southern Powder River Basin, most of which is held by production. Wold plans to complement its existing portfolio of three federal units by forming two more in 2016, drilling at least two horizontal wells in the over-pressured Frontier/Turner.

Still, the company is focusing its dollars in acquisitions rather than the drillbit. Wold added some 60,000 net acres to its holdings in 2015, raising its total net to 110,000 in the play in southern Campbell and northern Converse counties. The company has additional bolt-on acquisitions in its pipeline that it plans to execute on in early 2016.

“We are able to take advantage of the marketplace and bolster our position in a low-price environment,” said Wold. “We are focused with our geologic thesis and have been able to make meaningful investments in an area with a tremendous resource base.”

Wold said the Devon/RKI deal shows that the Powder River Basin is an emerging Tier 1 play. “There’s been a lot of chatter about the play. When you have a company like Devon that doubles down in the basin in a $40 environment, it emphasizes the resource potential in our stacked pays. It heightens activity.”

Competition is fierce, he said. Many private-equity-backed companies are interested in the Powder—Liberty Resources, funded by Riverstone Holdings, is a recent entrant—but not many large blocks are available, said Wold. “It’s difficult to buy blocks of 25,000 to 30,000 acres; there just aren’t any for sale.”

The lack of current development activity now seen in the Powder River Basin has less to do with rock quality and everything to do with leases, he said. The basin has been developed over 100 or more years on federal and state lands and there is meaningful well control—most of the basin is HBP.

“It doesn’t require the same level of development to hold leases,” Wold said. “It’s not like the Permian, Eagle Ford or Bakken where the majority of acreage is fee or term leases that require continuous development. You can hold a lot of acreage by unitizing formations, so we don’t have to put four or five rigs to work to hold it.

“If oil prices go down, we don’t have to keep drilling uneconomic wells just to hold on to our acreage positions.”

One way or the other, Wold plans to continue investing prudently in 2016, whether on acquisitions or drilling. “If oil stays low, we’ll keep focusing on acquisitions. As oil prices increase, we may transition to more drilling.”

For a 20% return, the breakeven is in the mid-$50s, he said. “We’ll need $50-plus oil before we’re drilling wells based on cash flow.”

Expectations

Ballard plans to be an active driller through 2016, given its hedge position and discretionary cash flow. “You’ll see a good number of wells drilled and operated by our company this year,” said Ballard. If prices hang around $35, however, “we’ll have to rethink the pace.”

At this point, the company plans 11 wells in Wyoming. “Drilling and completion cost reductions and some operational efficiencies have pushed our economic threshold below $50 for key areas,” he said. “With our 2016 hedges and a little recovery in oil prices, we expect to carry out our planned drilling program.”

Peak Energy’s Vaughn said he would like to see crude hit a bottom before he relaunches a rig in the play and is concerned the Federal Reserve’s interest rate increase could strengthen the dollar and put further downward pressure on oil prices.

“We’d like to get more confidence in the bottom” before drilling again, he said.

But he would “think seriously” about picking up rigs again once oil moves into the $40 to $45 window. “A lot of our wells work at $45. Anything above that only improves our mood.”

In the meantime it’s wait and see. The company is doing a substantial reserves review and taking a hard look at its data. “When we start back up, we want to be as high up on the learning curve as we can. The Powder River is an unsung, emerging basin with a lot of upside,” said Vaughn. “When the price of crude oil turns around, you’ll see it.”