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Linn Energy, LLC Message Board

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  • rrb1981 rrb1981 Apr 29, 2012 5:38 PM Flag

    Differences in Decline Rates of Vertical vs. Horizontal Wells and Other Stuff;

    rlp nice post on decline rates! A lot of info to absorb!!

    One thing to keep in mind with these high decline rates is that companies that already have a large flat production base can easily manage the high declines. These wells have 2 or 3 yrs of high decline before slowly dropping into the flat part of the curve, where most wells exhibit 6-7% annual decline.

    I was always enamored with the original Atlas Energy (ATN) because they had 30+ yrs of upper Devonian ("shallow") conventional Appalachia gas wells to the tune of about 100,000 mcf/d from several thousand wells! That slug of production exhibited about 6-7% decline and they were growing the company by drilling vertical and horizontal Marcellus shale wells. They were raising their overall company decline rate, but so long as they didn't drill too many Marcellus wells, it was very manageable. After 4 or 5 yrs, the Marcellus wells would become part of the "base".

    You will likely see an increase in Linn's overall decline rate in the coming years with the GW and Bakken helping push it up, while the recent acquisitions in E Texas & Hugoton will serve as ballast to moderate the rise since both of those deals are sub 10% decline properties (i.e. mature).

    I would argue that so long as management allocates capital for maintenance, E&P companies can manage high decline. I believe E&P MLPs can manage high decline drilling as well, but it will take both a strong base of flat line production as well as discipline to know that you shouldn't base your DCF off of wells that aren't yet near the flat part of the curve. For example, in the GW, Linn is pouring several hundred million in drilling high return wells. Wells that will drop 65% or more in Yr 1, followed by say 25%-35% in Yr 2 followed by say 10-15% in Yr 3 before hitting ~6% natural decline. Linn knows, like most producers, they will have to take the cash flow from the first couple of years and redeploy it back into the field to keep production up. That is fine, because the wells pay out quick and leave the company with a nice revenue stream once they flatten out.

    The problem that many producers face is that they are drilling at a rate of 2x or 3x their cash flow. They are borrowing money to fund drilling and the reserves they find/produce are serving as collateral for those wells. They repeat over and over and when they can no longer borrow, they face a massive crunch.

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