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Should there be a legal or industry accepted standard for reporting IP (Initial Production) rates on oil & gas wells? <\/p>\n
For both the industry and investors, it creates a quandary \u2013 do you want quick reporting of oil well flow rates, or do you want accurate and fair reporting?<\/p>\n
Energy producers are often quick to produce press releases with eye-popping Initial Production rates \u2013 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? <\/p>\n
Horizontal wells \u2013 which now account for almost 50% of all new wells drilled \u2013 have IP rates 3x-7x what vertical wells have \u2013 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.<\/p>\n
Sometimes companies report IP details, and sometimes they don\u2019t. It can be confusing for investors trying to determine what a company\u2019s stock is worth.<\/p>\n
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\u2019s production in a press release announcing the first month\u2019s production of a successful new well?<\/p>\n
\u201cIt\u2019s hard to set standards on IP rates as situations can vary, says Rock Energy CEO Allan Bey. \u201cObviously the longer the test the better with full disclosure of pressures etc., but sometimes you can\u2019t do a long test because of other circumstances.\u201d <\/p>\n
One CFO who asked not be named says \u201cYou can have quick or you can have fair \u2013 you choose. We choose 'fair' which means the info is not quick. Others choose differently.\u201d<\/p>\n
His comment brings up the flip side of this issue \u2013 there are companies who don\u2019t report any production rates until several wells have been drilled in a new play, and flowing for a month or two \u2013 which can often take six months \u2013 before they report flow rate data to the market. <\/p>\n
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.<\/p>\n
So what should retail investors do?<\/p>\n
Companies usually give production guidance for the year \u2013 both an average and year end rate \u2013 which will have factored in the declines and sustainable production rates from wells. That\u2019s usually found in both quarterly releases and in a presentation on the website.<\/p>\n
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\u2019s a 30 day test.<\/p>\n
Caveat emptor. <\/span><\/p>\n Keith Schaefer is the Previous posts:<\/p>\n
\nEditor\/Publisher of the Oil and Gas Investments Bulletin. He writes on
\nthe issues, trends and companies in the North American energy sector.
\nHe also has a paid subscription service where he covers junior and
\nintermediate stocks. His website is <\/span>www.oilandgas-investments.com<\/a><\/p>\n