Newsletter No. 14
Hello everyone!
Last month, our good friend and partner John Mauldin flew in from Puerto Rico to catch up with me and the team.
I really enjoy hosting John because he is so fantastic at asking questions. Because of it, every visit is interesting. Good questions make for great discussion!
For those of you who may not be familiar with John, he is a leading global economist and thought leader with hundreds of thousands of followers all over the globe.
He tells it like it is from his “Thoughts from the Frontline” newsletter. If you haven’t yet, check him out there. He does an amazing job sharing an educated and yet entertaining perspective of a variety of economic topics.
The purpose of his visit was to get an update, first-hand, on how the drilling is going in the Permian Basin. That focus really turned into a conversation about better understanding what makes for a good Oil prospect.
But before we get to that, we need to start at the end…
…Hard Eight BBQ here in Dallas. Man o man was that a good time. Before John left town, we had the chance to break bread together. There’s a lot of BBQ in DFW, and most of it is a cut above anywhere else in the country.
But there’s no experience quite like Hard Eight. You literally walk in the doors and get started by picking your meats off the grille. Just point, and the guys load your plate.
It was great food and great fellowship. And no, I do not have a deal with Hard Eight to promote them. When it’s that good, you can’t help talk about it. So when you’re in DFW, give it a try. You’ll be glad you did.
Now back to our main event…what makes for a good Oil prospect?
John was here to continue his research for a series of whitepapers about energy. He just started writing them covering relevant current events and related economic conditions. And, as you know, he likes to roll up his sleeves with all those good questions.
When you think about evaluating the merits of an Oil prospect, you have to think in terms of the risks of producing Oil and Natural Gas. In our case, that lens is further scrutinized in the context of the King ADD model (Acquire Develop Divest).
Even with all the technology, experienced people, and advanced equipment, you’re still effectively pushing a rope 2-4 miles deep into the earth to extract hydrocarbons so you can sell em.
And as I’ve said before, it’s dark down there!
Financial returns are never guaranteed, but there are opportunities to generate them if and when things go right. And it all really starts with getting the buying of oil and gas leases right…the Acquire phase of ADD.
We do a lot of analysis work to Acquire the right leases. John asked, “what makes them right?”
There are dozens of criteria to consider when evaluating a lease prospect. On that day with John, we covered 3 of the big ones. It is so important to find, analyze, and acquire oil and gas leases that contain the following attributes:
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Premium Rock. Premium rock is rock where forecast data indicates high economic opportunity and it’s available across the span and depth of the leasable acreage.
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Lots of Locations. Lots means at least 160 possible locations. Location volume of premium rock means economic value at scale.
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In-range of Services. Services refer to support services like people and pipelines. You need your location to be reasonably within range of services.
Let’s hit on that last one, In-range of Services, first. It’s a straightforward thing, but often gets overlooked. If pipelines and people (like mechanical maintenance providers and oil transport people to name a few) are not somewhat nearby, things are difficult before you even get started, because costs are exponentially higher and risk mitigation is more elusive.
While seemingly straightforward, that can be a tough thing to achieve. On the one hand, if all the support services were already located right there, John asked, “wouldn’t the area already be developed by another operator?”
The answer is yes and no. Yes, some of the areas are often already developed, conventionally, decades ago. But because technology and expertise in engineering was historically less mature, a lot of those areas were left underdeveloped. More on that in a minute.
Getting back to the first item…Premium Rock, more specifically through an industry lens, is defined today as the resource-richest of unconventional blanket depositional sands. That means, the rock (or sand) runs in layers all over the acreage and can be produced by drilling horizontal wells.
John then asked about the difference between conventional and unconventional.
Conventional is technically easier to extract with more traditional drilling methods and equipment. Conventional plays are more akin to an underground hill. In its simplest form, operators would drill down vertically in through the top of that hill into the reservoir underneath that contained hydrocarbons (Oil and Natural Gas) trapped inside.
Historically, conventional plays were the way to go because those types of reservoirs were not yet depleted and did not require complex engineering techniques like fracking.
As John dug deeper about unconventional, he was intrigued to learn that unconventional became viable over time as conventional plays had been depleted and were more difficult to find.
Within the context of risk, unconventional is a higher risk play because the hydrocarbons are essentially more tightly trapped within the layers of rock/sands. That’s why stimulating these formations (layers of rock/sands) is required. Stimulating means a lot more work including fracturing the formation to get them to release the hydrocarbons.
The upside to an unconventional play is that there are way more of them available. And once you figure out the engineering of a horizontal well within a blanket depositional formation, it scales because it’s repeatable across all the acreage. There’s simply much more available hydrocarbon volume to extract. That’s the reward…the beginning of the upside.
If you’re lucky, Premium Rock is available in multiple, stacked layers in the same acreage. When these formations are commercially productive in returning exponentially higher profits. In the business, these layers are called payzones.
So that left me and John with one more unanswered big criteria to ask about. “How are the number of Possible Locations accurately determined before actually acquiring the lease?”
Well therein lies more of the risk again. You don’t truly know until you make notable headway into Develop(ment) (the first D in ADD) of the field. But you can make educated location determinations.
Through the use of 3D seismic (underground bat sonar) and other land planning techniques, Geologists, Reservoir Engineers, and Landmen can determine Possible Locations in the pre-acquisition analysis. At King, we mitigate the risk further by engaging third-party engineering firms to help with the analysis.
Once the acreage is analyzed and Acquire(d), the team (the right team is critical as not all teams are created equal) goes to work on part two of ADD, Develop(ment).
And as expected, John had a lot more questions as Develop(ment) is where things get really interesting. It’s where all the risks and rewards really flush out in the proving up of the Acquire(d) lease acreage.
But that’s all the time we have for today! We’ll dig back into the Develop(ment) conversation in a future newsletter.
In the meantime, keep scrolling if you’d like to check out my recent radio interview and/or this week’s recommended reads. That third one is pretty good relative to the market for a divestiture play like we seek here at King.
Listen to the Fox News Radio interview with insights to supply and demand and soaring prices at the pump.
Recommended Reads
Why Oil Prices are Plunging Despite Falling Inventories
The $1 Million Math Problem Undermining Wind Energy
Is a Buyout Gusher Coming in the Permian Basin? Why a Takeover Boom Looms
Strategy, the Character of a Man, and Wisdom…From God’s Perspective
There are some outstanding results developing in the current program… KOPX Program 4. If you are not in it, and you are accredited, it’s a good time to have a conversation! You can schedule a Zoom here.
All the best,
Jay
