Should There Be Standardized Reporting of Well Results?
Source: Keith Schaefer, Oil and Gas Investments Bulletin (2/23/10)
Investors need to understand what they're reading on IP rates. . .
Should there be a legal or industry accepted standard for reporting IP (Initial Production) rates on oil & gas wells? For both the industry and investors, it creates a quandary—do you want quick reporting of oil well flow rates, or do you want accurate and fair reporting?
Energy producers are often quick to produce press releases with eye-popping Initial Production rates—but with little or no context. Was it a 12-hour test, 3-day test or 30-day test? Was it the average flow rate during that time or the ending flow rate?
Horizontal wells—which now account for almost 50% of all new wells drilled—have IP rates 3x-7x what vertical wells have—but decline rates are higher, which means there is potentially a much larger gap between the initially reported production rate in the press release and what production level the well stabilizes at.
Sometimes companies report IP details, and sometimes they don't. It can be confusing for investors trying to determine what a company's stock is worth.
And with decline rates (the decline rate is the drop in oil or gas production over 1 year) now often 60-85% in Year 1, are investors really getting a fair idea of a well's production in a press release announcing the first month's production of a successful new well? The graph below shows how steep these declines can be. A producer is able to fairly report what the top rate in the graph is, but that's not a realistic view of the well's production (and this is just a hypothetical example).
(Source: Simmons & Company International)
"It's hard to set standards on IP rates as situations can vary, says Rock Energy CEO Allan Bey. " Obviously the longer the test the better with full disclosure of pressures, etc.; but sometimes you can't do a long test because of other circumstances."
One CFO who asked not be named says "You can have quick or you can have fair—you choose. We choose "fair," which means the info is not quick. Others choose differently."
His comment brings up the flip side of this issue—there are companies who don't report any production rates until several wells have been drilled in a new play, and flowing for a month or two—which can often take six months—before they report flow rate data to the market.
This can be an issue because timeliness and transparency are important to all investors. There are pro and con arguments on all sides of this issue.
So what should retail investors do?
Companies usually give production guidance for the year—both an average and year end rate—which will have factored in the declines and sustainable production rates from wells. That's usually found in both quarterly releases and in a presentation on the website.
And more and more management teams are including well production profiles on their different plays in their investor presentation, that show what the average IP rates are, and how production declines month by month going out two years.
But as a general rule, I suggest that investors should understand that a well will produce at an average stabilized production rate of only 25%–50% of the reported IP rate in a press release, even if it's a 30-day test.
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