Launched in 2003, on the western edge of the Midland Basin in West Texas, development of the Wolfberry play began in earnest on the eastern side in 2006, predominantly in Howard, Glasscock and Reagan counties. In 2007, Albrecht & Associates Inc. conducted the first open sale of a Wolfberry property. Since then, the play within the larger Permian Basin has continued to expand and improve, and the number of Wolfberry transactions has continued to grow.

The median total depth drilled on the eastern side has increased from 8,486 feet in 2006 to 10,165 feet in 2010. While the Wolfcamp and Spraberry intervals continue to dominate production, operators have found other zones both up- and downhole that provide incremental rate and reserves.

Completions now routinely include everything from the Spraberry all the way down through the Fusselman. As deeper wells have led to better economics, drilling activity has also increased. Horizontal drilling has recently been introduced on the eastern side of the play in Glasscock County.

The annual number of Wolfberry wells drilled in the three eastern counties has increased threefold, from 87 wells in 2006 to 260 wells in 2010. Although it’s early, the eastern Midland Basin is already beginning to mimic the development path out west, with well results improving and areal extent expanding.

Downspacing value. Several operators on the west side are currently conducting pilot programs to test well spacing down to 20 acres in Andrews, Midland and Upton counties. The foundation for the idea of increased density drilling in the Wolfberry play is the amount of original oil in place (OOIP). Wolfberry volumetric estimates across the Basin indicate between 4- and 7 million barrels of OOIP on 40 acres. The inclusion of deeper and shallower zones pushes this number higher.

Typical recoveries from vertical wells range from 100,000 to 170,000 barrels of oil, yielding recovery factors of between 1.4% and 4.5% on 40 acres. Typical depletion-drive oil reservoirs with gas-to-oil ratios similar to the Wolfberry recover between 10% and 15% of OOIP. To get such recoveries in the Wolfberry, increased density drilling is necessary. OOIP upside is just one of the reasons the play has successfully sold time and again.

Marketplace. Data-room attendance has been high since 2007. Besides the play’s impressive economics, another reason for this activity is that acreage in the Permian Basin has been tied up for decades. Companies wishing to obtain a meaningful foothold in the play have been forced to buy their way in. Interested parties range in size from the largest public independent companies to some of the leanest private-equity-funded portfolio companies.

Much of the trend has been and is being developed by relatively smaller companies. These companies have maximized capital efficiency by drilling the appropriate number of wells in the proper locations to maximize their proved undeveloped (PUD) value. Wolfberry buyers have been larger companies seeking to get “oilier.” We expect that this trend will continue.

From a valuation perspective, traditional metrics such as price per daily production, per proved reserves or per acre can be misleading. Different packages have wide variances in ratios between proved developed producing (PDP) and PUD value, their overall decline profile, and the amount of acreage that the industry deems proved.

Despite the wide variation in common metrics, however, Wolfberry properties sell for a highly predictable price using the appropriate risk-adjusted discounted cash-flow model.

In play. To date, Albrecht has sold nine packages totaling nearly $2 billion and has several packages that will go to market in 2011. These coming deals represent a cross section of the play, from both the eastern and western Midland Basin to some properties near the horizontal development area in Glasscock County. If results from the ongoing pilot programs are favorable, it is likely that in late 2011 buyers will begin assigning incremental value to 20-acre development locations on the west side of the play.

For a storied basin defined by exciting oil plays for nearly a century, the Wolfberry has added a new chapter.

—Randy Dolan, Trent Foltz, Harrison Williams, Albrecht & Associates Inc. (713-951-9586)