Unhappy with frac crew and equipment delays; appraising another 920 potential drilling locations
Jagged Peak Energy (ticker: JAG) announced third quarter results today, showing a net loss of $15.2 million, or ($0.07) per share. After excluding for hedging and other special items, Jagged Peak earned a net $15.4 million in Q3.
The company has continued on its trajectory of rapid growth, producing 19,180 BOEPD in the quarter. This represents 30% sequential growth and slightly more than triple the company’s production in Q3 2016. This rate of growth is expected to increase further, with the company producing about 26,500 BOEPD in Q4.
Jagged Peak spud 15 wells and completed 11 during Q3, and participated in drilling seven non-operated wells. The company reports its optimized completions wells continue to outperform, exceeding the type curve by an average of 35% in the lower Wolfcamp A. Jagged Peak’s first 2nd Bone Spring well is producing encouraging results, and has now produced just over 100 MBOE. If the 2nd Bone Spring becomes a target of development, it would add over 200 locations to Jagged Peak’s drilling inventory, most of which would be 1.2 and 2 section locations.
New zones, spacing could add 920 drilling locations
Jagged Peak continues to test new zones on its acreage, and has found recent success. The company announced the success of its first Woodford Shale exploration well, which came online this quarter. The well produced an IP30 of 227 BOEPD per 1000-foot lateral, making it competitive with many other plays in the Permian.
The Woodford Shale is a source rock and is best known as the target across much of the southern Midcontinent. It lies below the Wolfcamp, and is 210 to 380 feet thick. Jagged Peak believes development of the Woodford Shale could add 120 locations to its drilling inventory, and has planned a 3D seismic program to evaluate the formation.
Jagged Peak also announced the results of its first Wolfcamp C well, which achieved a 24-hour IP of 1,179 BOEPD, with a high oil cut. The Wolfcamp C is prospective in about 70% of the company’s acreage, and could add over 200 locations to the drilling inventory.
When combined with Jagged Peak’s previously-announced 2nd Bone Spring exploration and its current testing of closer spacing, Jagged Peak is appraising more than 920 potential drilling locations. This would add more than 65% to the company’s drilling inventory.
Inexperienced crews and unreliable equipment bring delays to frac operations
The news is not entirely good for Jagged Peak, though, as Chairman, CEO and President Joe Jaggers discussed. “We have experienced completion delays related to frac fleet equipment reliability from our service providers and the learning curve of less experienced crews. We have communicated these issues to our service providers, and they are being actively addressed within their individual organizations. These delays have increased our completed well costs and will reduce our total number of well completions in both the third and fourth quarters of 2017. Although we would be able to offset the impact of these delays by deploying additional spot frac fleets, we are unwilling to continue incurring the additional costs associated with these fleets. We have seen the additional costs of spot fleets approach $1 million per well, so we have chosen to be efficient with our capital and to preserve the strongest economic returns possible from our wells… Any delayed wells will be completed in early 2018.”
Q&A from today’s Q3 earnings call
Q: So, correct me if I’m wrong, I believe this is probably the first horizontal Woodford well that’s been drilled by industry, kind of not counting the vertical wells drilled a decade ago. And then my second question has to do with, as you drill down into the deeper section into the Woodford, did you see anything promising in the shell or sort of the Mississippian environment section?
JAG: I’ll tag on the first part of it and then turn it over to John who can talk more about the strat column there but there are a portion Oklahoma that are literally thousands of Woodford wells. It is a usually prolific oil and gas source rock, and it’s also produced horizontally on the Western side of the Delaware Basin, the Alpine High situation there. And so we’re – we’re not aware of any horizontals or let’s say one or two in our areas – go ahead John.
JAG: Yeah, sorry. The QEP and [inaudible] have both drilled horizontals north of us with I think similar exploration concepts but encountered some varying rock conditions. Our general model for maturity with depth is fairly consistent in our area but that’s variable based on some – there has been some intrusive bodies in the area that are kind of changed the thermal history.
So there definitely is a sweet spot and you can kind of use structure and depth to the Woodford as a proxy to get you in the neighborhood but then there is going to be a bunch of solid variability that’s going to affect, we think the maturity and the producibility combined what we think we have in optimal horizontal target with very good properties, very little clay which is a concern everyone who spoken about the Woodford about here has spoken about the clay content.
And so those are the things that we saw was very encouraging and encouraged us to try a horizontal to test the producibility after we knew the kind of a source rock parameters and the fact that we were in the oil window.
As far as what we saw in the way down, we collected core data of course, all the way from the below the Woodford up through the Bone Spring, and we did see some encouraging zones with high TOC and good maturity. We definitely saw some intriguing things in between the Woodford and the Wolfcamp, and so we do have stuff to target there.
Q: I was hoping to just explore these frac performance issues a little bit and maybe get some insight into the conversations you had with the – with your service providers. Really interested in what assurances they gave you with any that things should improve going forward.
JAG: Our spot crews as I mentioned earlier are sometimes being brought into the mix with the equivalent that that may have been stack for a while in addition to newer staff. So we’re working through some of those issues of just your reliability of equipment and training approves and it’s not only limited to our frac fleets, it’s also other associated services.
So, we’re working with them and we’ve seen these types of headwinds in past cycles, so I think if we focus on contracting crews we’ll see the performance there at groups.
JAG: I would just add to that in terms of assurance because I know which say needs to be back about what you do. I’ve spoken to one of the contract companies and therefore it has approved a blunder upgrade to get those up to stack, and they’ve also approved kind of reworking all the pumps, rebuilding fluid ends and drivers. And we should start to see that equipment on this next fleet that shows up in January, completely rebuilding pumps.
