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Must-know: The upside of multiple horizons in the Bakken Shale

Ingrid Pan, CFA

A must-know overview of the Bakken Shale oil play (Part 14 of 14)

(Continued from Part 13)

Value in the Bakken Shale

One factor in the Bakken that has increased its value in the eyes of many producers is that oil can be produced from more than one “horizon,” or layer of rock. Originally, oil had been produced from only the “Bakken” layer, which is where the play got its name from. However, over the past few years, many companies also began to produce oil from the Three Forks Sanish formation or “TFS,” which is located below the Bakken. More recently, companies have begun to test lower layers of the TFS, also referred to as different “benches,” and these lower layers are referred to by number such as the “TFS 2″ and “TFS 3,” with higher numbers representing lower layers.

Many companies have noted in recent presentations and earnings reports that they’ve had positive results producing from these lower horizons and are beginning to develop them.

For example, Oasis Petroleum noted on its 3Q13 earnings release that it had successfully produced from the second and third benches of the Three Forks formation and planned to drill further from those horizons. The company stated on its last call,

  • “Preliminary testing and core work indicate there is a significant amount of resource in the second and third bench of the Three Forks across parts of our acreage. In Indian Hills, we have two second bench tests currently on production, the Patsy and Paul S wells, and one third bench, the Omlid, online as well. All three wells look similar to first bench wells in the area… In the next two quarters alone, we plan to drill an additional 15 lower bench wells, and as we look to 2014, we expect the overall program to be pretty evenly balanced between Bakken and Three Forks wells.”

Being able to produce oil from these different layers increases the upside for companies operating in this play. Using a simple theoretical example, if a company had 10 potential drilling locations (meaning 10 potential wells) from one layer, and discovered that a second layer was also productive and stretched across all of its acreage, the company could now drill more wells than the 10 originally planned (the exact number would depend on the optimal spacing of the wells for that layer, and note also that wells and horizons are not uniform in their productivity). The additional potential wells mean more potential future production and upside to the company’s valuation.

For example, this slide from Continental Resources’ latest investor presentation shows that after incorporating the upside of the Lower Three Forks, the potential oil recovery from its position increased by over 50%.

Note that being able to produce from multiple horizons is also beneficial, as the company doesn’t have to spend additional capital on acreage to gain this oil upside, and being able to drill several wells from multiple horizons on one single prepared well site is also more capital-efficient than drilling several wells spread across multiple well sites.

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