Hess to Spend More in Bakken in 2012
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Hess Corp. (NYSE: HES) has adjusted the company’s capital budget for 2012 and expects to spend an extra billion dollars on the Bakken play in the last half of the year. The company is facing higher costs on drilling and completion services and more infrastructure spending.
Second Quarter of 2012
Hess reported average daily production of 55,000 barrels of oil equivalent (BOE) from the Bakken formation in the second quarter of 2012, up more than 100% from 25,000 BOE per day in the second quarter of 2011. The company expects production in 2012 to average between 54,000 and 58,000 BOE per day, down slightly from the original goal of 60,000 BOE per day set earlier in the year.
Bakken Overview
Hess has more than 800,000 net acres under lease prospective for the Bakken formation and plans to operate an average of 16 rigs here in 2012. The company’s goal is to ramp up development and generate net production of 120,000 BOE per day from its properties by 2015.
Capital Spending Increase
The original investment plan that was set by Hess for 2012 called for $1.9 billion of capital spending on the Bakken during the year. This would have represented about 28% of its $6.8 billion exploratory and development spending in 2012.
Hess has now increased capital spending for 2012 to $8.5 billion and will put an extra $1 billion toward development and other spending in the Bakken. The $3 billion in capital spending here represents one of the largest investments in this area.
Continental Resources (NYSE: CLR) is also active in the Bakken play and plans to spend the majority of its $2.3 billion capital budget in this area in 2012. The company has approximately 939,000 net acres under lease across North Dakota and Montana.
Continental Resources has aggressively moved to develop these properties and increased companywide production to above 100,000 BOE per day in June 2012, with approximately 69% of this production composed of crude oil and other liquids.
Marathon Oil (NYSE: MRO) has 416,000 net acres under lease prospective for the Bakken and reported oil production of 25,000 barrels per day from here in the second quarter of 2012. The recent decline in commodity prices has caused the company to slow development of the Bakken, and Marathon Oil plans to reduce its rig count until costs decline enough to generate higher returns.
Extra Spending
Hess attributed the extra spending to the company’s decision to drill in areas where it has a higher working interest. This accounts for about $500 million of the extra spending but will have the benefit of converting all of its leases here from term to held by production.
Hess will also spend an additional $150 million in 2012 on infrastructure to gather and process the company’s production in the area.
Hess is seeing higher costs in the Bakken and expects to spend an extra $400 million on drilling and completion costs in 2012. This is driven by the use of ceramic proppant and a slower transition to a different and cheaper drilling design that incorporates sliding sleeves and fewer fracturing stages. The company is also seeing higher costs from its share of non operated wells being drilled by others in the Bakken.
Hess reported an average cost of $11.6 million to drill and complete a Bakken well during the second quarter of 2012. This was a much higher cost than many of its competitors that are active in the Bakken. Marathon Oil uses an $8.6 million average cost for Bakken wells and Continental Resources has driven costs down to $7.7 million for wells drilled as part of its ECO – pad design.
Kodiak Oil and Gas (NYSE: KOG) uses a $10.5 million drilling and completion cost for what the company refers to as long lateral wells in the Bakken. GeoResources (NASDAQ: GEOI) has budgeted Bakken well costs between $7.5 million and $10.5 million depending on the well design and project area.
Hess experienced a slower than expected transition to a “sliding sleeve” design that used only 34 hydraulic fracturing stages compared to the old design that used 38 stages. The company expects to get the average Bakken well to under $10 million each by the fourth quarter of 2012.
Although higher costs seem to be a fact of life for Hess and other operators in the onshore United States, recent reports for the second quarter of 2012 indicate that this trend is starting to reverse. This may be what is needed to move returns higher and initiate another up cycle in this region.
shaleplays has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
