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FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Oil Companies Standardized Reporting of Oil Wells?

Commodities / Oil Companies Feb 23, 2010 - 01:55 PM GMT

By: Keith_Schaefer

Commodities

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 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 drop in oil or gas production over one year) now often 60-85% in Year One, 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?

“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, 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.

Caveat emptor. 

–—–—–—–—–—–—–—–—–—–—–—–—–—–—–—–—–

About Oil & Gas Investments Bulletin

Keith Schaefer, Editor and Publisher of Oil & Gas Investments Bulletin, writes on oil and natural gas markets - and stocks - in a simple, easy to read manner. He uses research reports and trade magazines, interviews industry experts and executives to identify trends in the oil and gas industry - and writes about them in a public blog. He then finds investments that make money based on that information. Company information is shared only with Oil & Gas Investments subscribers in the Bulletin - they see what he’s buying, when he buys it, and why.

The Oil & Gas Investments Bulletin subscription service finds, researches and profiles growing oil and gas companies.  The Oil and Gas Investments Bulletin is a completely independent service, written to build subscriber loyalty. Companies do not pay in any way to be profiled. For more information about the Bulletin or to subscribe, please visit: www.oilandgas-investments.com.

Legal Disclaimer: Under no circumstances should any Oil and Gas Investments Bulletin material be construed as an offering of securities or investment advice. Readers should consult with his/her professional investment advisor regarding investments in securities referred to herein. It is our opinion that junior public oil and gas companies should be evaluated as speculative investments. The companies on which we focus are typically smaller, early stage, oil and gas producers. Such companies by nature carry a high level of risk. Keith Schaefer is not a registered investment dealer or advisor. No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer to buy or sell the securities mentioned, or the giving of investment advice. Oil and Gas Investments is a commercial enterprise whose revenue is solely derived from subscription fees. It has been designed to serve as a research portal for subscribers, who must rely on themselves or their investment advisors in determining the suitability of any investment decisions they wish to make. Keith Schaefer does not receive fees directly or indirectly in connection with any comments or opinions expressed in his reports. He bases his investment decisions based on his research, and will state in each instance the shares held by him in each company. The copyright in all material on this site is held or used by permission by us. The contents of this site are provided for informational purposes only and may not, in any form or by any means, be copied or reproduced, summarized, distributed, modified, transmitted, revised or commercially exploited without our prior written permission.

© 2010, Oil & Gas Investments Bulletin

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