The production figures coming out in a few days for June are going to be very interesting from several view points. I will be paying special attention to the production from RU2A (MILL's most prolific well by a large multiplier). The June figures will mark the one year anniversary for that well. It came on busting 41000 BOP monthly. Over the last year it has declined to producing only 24820 in May. A decline in production of 16199 BOP Monthly. For you math challenged longs that is a 39% decline and we have one month to go! I guess for a die hard long that is pretty close to the 10% MILL claims to be the annual average decline rate for their AK oil. And remember this is their big boy production wise. Sword 1 Jun all three zones flowing most of the month will be a number to watch going forward to see how fast production falls off in that well. RU8, stimulated and re-stimulated and likely still no oil, oh, wait RU8 has shows of both oil and gas all the way to the bottom. OK I will let up for now. Short term pop then get out.
First it was "water cut" - then it was "no financing" - then it was "fancy managers" - now, at the beginning of the new phase of deep wells and big oil, the call will be "depletion rates".
ALL wells run big at first, then they settle into a curve (not a line - a CURVE). So a first year 30% decline becomes a 10% decline becomes a 5% decline over the life of the well. That is why we have reserve reports in the first place.
Verado knows who is reading Yahoo and why they sell in panic. He's making money shorting. But there is nothing wrong with David Hall's management of the formation, the formation itself, or the actual decline curves. As per DH the wells are perfoming quite nicely. The Osprey has a dedicated (and OWNED) rig on top of it, just as it always should have, except that Forest was to stupid to buy one. (Oh year, the bashers were criticizing the rig purchase, remember?). That rig gets move around for service work, but we are looking at a timespan of many years, first we need to find where the big oil is.
If Verado is yelling "dry hole" - like he did with WMRU2 - then understand he already shot ALL CREDIBILITY by not recanting after WMRU2 came in.
And from what DH said on the CC (hey, Verado, one of your buddies said he was going to Hilcorp, right? Huh?) RU8 isn't exactly dry, just weak and needing a sidetrack in the future. That's the oil business. CIE and MILL are progressing nicely. The Petroleum News article section "The Explorers" came out last week and explained a lot of what they have been doing, such as holding acreage by doing road and pad building, getting ready for gas exploration, and developing previously "abandoned, discarded assets" into a success story of the little guy making it by smarts and perseverance. In time, the stockHOLDERS will see some wealth.
In my book they have not been clear on the decline rates, or nearly specific enough, and that is probably the one legitimate criticism leveled against management.
However, the declines rates stated were never, ever applied to a brand new well like Ru-2A, which is in the first year of production. So that comment was blown way out of proportion by Verado. RU-2A is one heck of a well, having paid for itself in a few months and then throwing off excess cash, its a success by any measure even if management does not know the IRR of the top of their heads, for that well its fantastic. Even if it went dry tomorrow its still fantastic, and right now it shows signs of producing for quite a while.
Plus RU-2A is coming up on the time that the pump needs to be replaced and there will be a production hiccup with that, we have been warned about the pump replacements many times. I really believe that this well needs to produce for a few years before we can make any statements about declines rates here for all the reasons that Coleman noted plus a few more.
The biggest challenge that I see right now with the current set up on the Osprey is pump replacement and other maintenance while drilling another well. Maybe there would be time for both to drill a new well. If two rigs can fit on the Osprey, that certainly would be my preference, one doing maintenance and the other drilling, however, I am doubting that two full sized rigs can fit on the Osprey. I suspect that things get crowded when a well has to be completed and the rig moves on to something else.
The rig was money well spent since I though Forest had said that after RU7 was drilled that they were replacing the contracted Nabors rig with a smaller hydraulic rig so that they could avoid lengthy contracts (the Nabors rig was a 3 yr agreement). They said that the smaller rig would save 15 - 20 % and that can add up when you are spending tens of thousands of dollars per day on the rental. I thought that they were paying around $25K per day but saw another article that quoted the savings as being as much as $100K per day. Large variance but basically Forest was fixated on expenses but, then again, oil was in the low $20's.
Verado would utterly hate shale wells with their exceedingly high depletion rates. You have to dril, drill, drill just to maintain existing production. He also fails to mention that both RU3 and 4 were nice oil discoveries that were completed for fuel gas. Once that is depleted, they can be recompleted to access the oil.
It can be tough for the little guy simply because the leases and licenses have requirements to be met. They are the success story of the Alaska rebate program. Agree that we need to find the big oil but I am wondering if RU9 is a success, whether they should drill another into that fault block since the rig would already be in position. Might be a way to further increase production before going into the northern fault block. Stop giving the rig frequent flyer miles as it is moved around and focus on developing what you have.
Sentiment: Strong Buy
I pray that you are half right. I must take issue though on the decreased Cook Inlet production. Another poster stated that as recently as April, Hall said that yearly declines were around 15% when in fact they were more like 40%. Despite your comments noted above, isn't that something that bothers you?
Not all three Sword zones were running for the full month so it will not be until late August that we will be able to get a true handle on that in terms of production for a full month. You may recall from the call that they had to wait for the comingling order before production from the third zone could begin. Then, of course, it will be another month to look at the decline.
Sentiment: Strong Buy