Infill Drilling's Impact on Investors

High-density drilling puts more wells on a single pad. For investors, that's good and bad. For Mainstream Investors LLC, it's a great thing. With a team of oilfield veterans, the team exemplifies how infill drilling programs are impacting the play.
By Luke Geiver | February 05, 2014

Investing in the Bakken’s oil and gas industry is never guaranteed, even if you are Mark Anderson. In 2012, he became the president of Minot, N.D.-based Mainstream Investors LLC after a 20-year career in the financial services industry. The company was founded by a $2 million investment from Bob Mau, a recent inductee into the North Dakota Petroleum Council’s Hall of Fame and the president of MW Industries. “He recognized the opportunity to create a company that would provide North Dakotans access to the Bakken,” Anderson says. “We wanted to provide a vehicle for people to participate in what is going on.”

Anderson was able to assemble a cast of oilfield veterans onto a board of governors to help formulate and guide Mainstream’s investment choices. “The caliber of the individuals that are involved with our team is amazing,” he says. Team members include geologists, well service providers and petroleum engineers. The company recently raised another $10 million, all of which will go towards Bakken or Three Forks wells. But, even with an all-star cast, a background in finance and an oil well investment focus that features a near guarantee—Bakken wells are successful more than 95 percent of the time—Anderson and his investment team must find a way to succeed in a changing era of development in the Williston Basin. Efficiency gains associated with drilling rigs, the practice of multi-well pad construction and the movement by many operators to begin or continue infill drilling programs means investors of all kinds have to face a new reality not present in the Bakken circa 2006.

Investors involved with single spacing units from 2006 to 2009 most likely required capital for only one well. Today, as operators practice infill drilling, a single spacing unit could feature 16 wells. “The high density drilling has really been a game changer for investors,” Anderson says.

How Infill Drilling Impacts Investment
Mainstream purchases leasehold interests for working interests in producing wells and spacing units, which means the Minot-company participates as a non-operator. The company participates in the expense side of the well and pay’s its portion of the costs required to bring the well on production, an act that means Mainstream also gets to participate in the revenue created from that production. The advantage to purchasing leaseholds is that once an investor participates in a given spacing unit, that investor gets to participate in all future wells on that unit. On an individual basis, well costs in the Williston Basin can range from $7 million to $12 million.

In early 2013, Mainstream bought its first leaseholds in the Williston Basin. At the time, only one of the leases had a well spudded. Anderson’s team now has 16 wells authorized for drilling, 11 of which have been permitted and are in various stages in the production startup process. The company is working with three different operators, Emerald Oil Inc., Kodiak Oil & Gas and Hess Corp. “The small exposure has blossomed from a single well on a single lease to 16 wells and more to come,” Anderson says.

The escalation of the investment company’s wells and well costs is not something that all investors can manage. Smaller investors that were once looking to participate on a smaller level or a single well are finding it difficult to continue participating in the leases that they own, Anderson says, because of the volume of wells that are being drilled on a single spacing unit. “The costs that they are obligated to pay to participate are now multiplied by 4, 8, 12 or 16. It is very capital intensive today.” Past drilling programs may have only contained a single well. The single wells were planned to help operators secure their lease acres and hold the acres by production, a process that keeps the acres under contract for the life of the producing wells on the acres.

Infill drilling has created a new trend amongst investors: consolidation. Anderson and his team will buy smaller lease hold interests from investors who are unable to participate financially in new wells, he says. “We pool investor capital together. We have several investors with a larger capital base to work with. We can take advantage of larger deals.”

Anderson is specifically in the market for applications for expenditures (AFEs). The AFEs are letters sent to leaseholders from an operator that verify an operator has filed and received permission to drill on a particular spacing unit. The letter indicates what the operator anticipates for the cost of drilling and completing the wells. The letter allows the leaseholder to opt in and pay for part of the production costs. If leasehold owners don’t have the capital to participate, they sell their leasehold interests. “We buy AFEs. We are buying the working interest and it already has a drilling program associated with it,” he says.

The practice of infill drilling presents a two-sided coin, Andersen adds. “The advantage for any leaseholder is that you buy the leasehold once and then you get to participate in multiple wells. The disadvantage would be the capital required to do so.”

Mainstreaming the Investment Process
To determine which leaseholds and AFEs are worth pursuing, Anderson reviews several elements of the Bakken and Three Forks production process, including: new permitting activity, production reports, decline curves and even the price operators are getting for oil sold. That process is possible to perform by almost any investor. For an additional step, the team relies on its internal knowledge and understanding of the industry.

Samantha Roberts, a geologist from Roberts Geology Services, is one of the team members with extensive industry experience applicable to the investment process used by Mainstream. After graduating from the University of North Dakota, Roberts moved to Arizona to pursue a job in her field. Two years after moving to Arizona, she landed her first job in the environmental inspection field, a job she says would not have happened in the slow oilfield job market of North Dakota. Today she is a well-site geologist, or geosteerer, responsible for drilling horizontal wells mainly in the Bakken formation for one of the largest leasehold operators in the play.

Roberts was contacted by Anderson after moving back to North Dakota, and now spends part of her week working on investment research and information for Mainstream. She has worked on several wells and formed a valuable knowledge base about trends in drilling. Although Roberts believes drilling a well is not a precise science, she does say a geologist guiding a drilling rig operator has to know how to make quick decisions. Geology can change 100 feet from where the geologist thought it had a handle of the well, she says. “I’ve yet to find one that I can say is easy.”

When Roberts first started in the Williston Basin, the goal was to drill a well without putting it into the shale, doing so would cost the operator money to sidetrack the well and build a trough to reroute the well out of the shale that could take 18 hours to go 30 feet. “Now the target zones are only 8 foot zones, they aren’t based on porosity, they are just based on drilling and steering at targets,” she says. Three years ago, building the curve took roughly three days and today it takes only 12 hours. The time to drill a well has also decreased, she adds, going from 24 days to 15 days in a three-year period. With walking rigs, Roberts and her team can drill four to six wells in the time it used to take to drill two.

On the completion side of the process, Roberts is seeing more operators putting cement into the liner on the lateral portion of the well. “If you do that you have to minimize dog legs. You can’t climb five feet in 100 feet because you would put too much severity in there. It would be too hard to put the liners in,” she says. Drilling wells purposely for completion strategies is becoming more integrated than ever before, but every operator still goes about oil production differently. Some operators will drill an entire well start to finish with one size pipe while others will drill all of the curves with a 5-inch pipe and then come back to do the laterals with 4-inch pipe.

Insight on drilling trends and the drilling order for a series of planned wells in a particular spacing unit is a major asset to the Mainstream team, Anderson says. And, it’s not just Roberts who supplies the group with useful perspective.

Michael Sweeney, founder of two oilfield services companies acquired by Waste Management in 2013, has also joined the Mainstream team. For both Andersen and Sweeney, it was a perfect match. “Before joining Mainstream, I didn’t know where I should invest or how to get involved in the Bakken as a private investor,” he says. “Even being in the business, it is a daunting task. There is just so much to the oil and exploration business.”

Sweeney previously owned Summit Energy Services, a full-service roustabout company that helped in building well pads, roads and tank batteries. He also owned Liquid Logistics, a water transport and handling company. “It was an exciting time, we had five different offers for the businesses. Waste Management had the best,” he says.

Since joining Mainstream, Sweeney has learned the complexities of the AFEs. “You could buy into an AFE, then a year later the operator went and got permission for four more wells on the same site. They come back to the investor and ask if the investor wants to be involved, and if the answer is yes, they have to invest four times as much as they previously thought.”

Most non-institutional investors can’t keep up with that pace, he says. One of the main aspects of Mainstream that Sweeney is interested in is a plan to gain a larger investor base. The idea was to start with a group of high-dollar investors to gain more access to the Bakken, “and then open up subsequent investment opportunities so people could put in smaller amounts of $100 or $200 so we could have thousands of investors each with a smaller stake,” he says. “I would have loved to have had Mainstream a few years ago.”

Although Anderson believes infill drilling is making it harder for smaller investors to participate in the Bakken, there is evidence that if investors can purchase leaseholds for spacing units complete with AFEs and four-well drilling programs, there is a bright future or a return on investment by 2020. The North Dakota Department of Mineral Resources has already permitted roughly 2,000 wells in 2014. Through 2019, the DMR has permitted almost another 6,000 wells. In 2014, 403 permits were approved on 1,280-acre spacing units that will have four wells, a number nearly double the next closest well permit. The second closest permit type totals 202 permits approved for 1,280-spacing units for 7 wells.

Regardless of the well count or the number of wells per pad, Mainstream offers a clear example of an investment company that is taking advantage of the start of the infill drilling phase in the Williston Basin. For Anderson, his team of oilfield veterans keeps his sights set on new investments. “The opportunity we have here, the scope and scale, is very exciting. This is a long-term play and it is going to be around for a long time.”
Author: Luke Geiver
Managing Editor, The Bakken magazine