SAN ANTONIO—Industry’s unawareness of the true impact of well interference in full field development scenarios across the U.S. unconventionals has led to some painful financial lessons across operator asset bases. Aggressive well spacing estimates fueled valuations that are now being adjusted downward as programs are failing to deliver on the full promise of the areas under development.

These well interactions are robbing resource across multiple well bores and prompting operators to upspace future unit drilling plans, which is having a finance ripple effect across all parts of the industry. Now that Wall Street has caught up to the problem, companies valuations are suffering.

“The number one mistake was setting expectations too high,” Seaport Global analyst Mike Kelly told attendees at Hart Energy's recent Well Interference Forum prior to the DUG Eagle Ford Conference and Exhibition in San Antonio. “We got fooled by these inflated inventory counts. Then we kind of fed off of it. We had everyone competing on how many wells they could put in a one-mile section.”

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Another issue early on was the focus on single well economics and the lure of an attractive 24-hour initial production rate. The Wall Street assumption, fueled by operators, was that these numbers could and would be repeatable across a drilling unit. In the third quarter of 2017, Continental Resources told investors that after 25 days at its 10-well Compton unit in Oklahoma STACK play, everything was going as planned. That eventually changed.

“The next quarter, after more history, the fessed up to two things—10 wells is too much, it’s probably eight,” Kelly said. “And those eight wells, they’re not 1.7 million barrel (MMbbl) EURs, you should probably model 1.2 [MMbbl]. The stock dropped 10% instantly.”

Now that Wall Street understands more about well interference, being seduced by single well type curves is a thing of the past. They also realize that upspacing is probably necessary favoring increased rate of return and free cash flow. In addition, initial production rates are unimportant—180-day rates are more in favor for comparison purposes.

“Sequencing matters, and the best thing you can do is probably go into some sort of cube or tank development,” Kelly added. “Encana really has been the leader on this front. That has some implications though for Wall Street folks. We’re saying, hey, you’ve got to bring on more wells on a pad at the same time—that really tells you that it is a bigger company game. It requires additional capital, knowledge, and scale does matter. You’ve seen a migration across Wall Street of really these larger players being thought of to really execute these multiwell developments across their acreage.”

Kelly believes that the main culprit to the value destruction was simply too much of a good thing.

“In 2015, Wall Street would give you a valuation that was 8x EBITDA,” he said. “Today, that’s 4.1 times for my coverage universe. There has been massive value destruction here. Maybe some of these child wells that aren’t so productive can help slow some of this torrid growth pace in the US. Bad for micro, but maybe good for the macro.”

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