playing enough short game to get to the long game :: revisiting the Parsley-Jagged deal at $30 strip

Golf, like drilling oil wells, is a strategy game. When do I go for the green versus laying up and saving par? Sub $30 oil demands a great short game while still preserving upside when it’s time to deploy the long game.

When Parsley Energy announced their acquisition of Jagged Peak in October 2019, WTI was trading at $55/bbl. Though the all-stock nature of the transaction has protected their downside, Parsley still faces the question: “how can we economically develop the Jagged Peak acreage?” Bring this back to the golf analogy, what short game strategy can they play with limited capital and limited risk to preserve their long game upside?

We’ve analyzed the Jagged acreage with our machine learning models and came up with a three-step program for Parsley that increases NPV by $2.5 MM/well, focuses on the most-predictable units to minimize downside risk, and preserves future development optionality by selectively delaying certain landing zones. The short game, combined with the long game. If you play strategically, you can still achieve both.

Recap: scenario driven analysis of the deal

In January, we analyzed the transaction using Novi Prediction Engine. We considered the four spacing/stacking scenarios and five completions designs outlined below.

• 1500 #/ft, 1250 gal/ft
• 1750 #/ft, 1500 gal/ft
• 2000 #/ft, 2100 gal/ft (Jagged Peak design)
• 2400 #/ft, 2100 gal/ft (Parsley design)
• 2700 #/ft, 2400 gal/ft

We made a prediction for every single well, with every single completion design — in total, we ended up with 12,335 predictions across the acreage. For this analysis, we reran our original Parsley-Jagged scenarios at $40/bbl and $30/bbl.

A critical finding from our original analysis is that oil production craters with tighter spacing, and GOR goes through the roof. As long as Waha prices stay depressed, this relationship will push operators towards wider spacing.

Improving capital efficiency by widening spacing and cutting proppant loading

At $30/bbl, the marginal uplift in recovery from more proppant and more wells just isn’t worth the cost. In the chart below, we have plotted average NPV & IRR for the four spacing configurations at $30/bbl. Decreasing from 16WPS & 2400 #/ft down to 8 WPS & 1500#/ft dramatically improves returns — doubling the IRR and bringing the per-well NPV back above the $2MM mark.

Looking across a broader range of designs, we find the 1500 #/ft job at 8 wells per section offers “good enough” returns, even at $30/bbl, without throwing away all your inventory at 4 wells per section.

Avoiding “duds” by focusing on high certainty acreage

During a price downturn, with precious little capital to spend on D&C, every well counts. Missing forecasted volumes can be punishing even at $65 oil, and a side effect of drilling fewer wells is that aggregate uncertainty increases — you are averaging errors across fewer wells. We took advantage of Novi Confidence Interval data (published with every Novi prediction configurable by the user) to quantify uncertainty across the legacy Jagged Peak acreage.

You can see how we did this in the video below, showing Novi Prediction Engine being used to configure the outputs we used for this analysis:

For every well we generated P10, P35, P50, P65, and P90 predictions for oil, gas, and water streams. Our predictions show the highest chance of productions landing below forecast occurs in the Big Tex and Cochise areas. Even though their P50 oil predictions are similar to the Whiskey River area, the P10s are much lower. Parsley had already downgraded Big Tex before the downturn, but our analysis suggests that the Cochise area should viewed as upside contingent on a price upswing or further delineation by offset operators to increase confidence.

For more on this topic, click here for an example use case of Novi confidence intervals applied to risking DUC inventory.

Delaying Wolfcamp B & C zones

At today’s strip, focusing on most profitable zones is prudent short game. This does carry the risk of damaging the reservoir for potential infill, however at current strip the marginal zones may need to be dropped regardless. Previously, we looked at the potential for Wolfcamp B infill drilling in the context of “additional zone upside,” but at today’s strip, it makes sense to put every zone on the chopping block. We used our software to evaluate the impact of a two-year infill on all four primary zones, along with delaying the Third Bone Springs & WC A-Lower together, and WC A&B together.

The below chart describes the scenarios we studied. In all cases, we assumed a two-year gap between primary development (the filled circles) and infill (the hollow circles). That could have been tailored for specific requirements or future strip expectations.

The below results from Novi Prediction Engine are for the Whiskey River area at 8 wells per section and 1500 #/ft. The red diagonal cutting across the chart is the impact of delaying each zone (y-axis) on the production of each formation (x-axis). Each zone shows approximately 5-9% average degradation as a result of two-year delay. Our model is also picking up that delaying one zone doesn’t just damage its EUR, it enhances EUR for other zones.

Parsley’s options to manage the legacy Jagged Peak acreage aren’t just “reduce completion size and widen spacing” — they can also get a big uplift in returns by delaying drilling the Wolfcamp B & C zones. Here’s how cutting zones for this year’s development will improve returns in the Whiskey River area:

The good news is that the delayed Wolfcamp B & C zones, even with that 6-8% degradation, can still earn a handsome return if prices bounce back to $50/bbl in 2022.

To see how we configured the infill study and for a deeper dive on the results, take a look at this video:

Conclusions

We would recommend a three-step process for Parsley to manage the legacy Jagged Peak acreage and survive the downturn:

Step one: Improve capital efficiency (~12% IRR Improvement)

• Reduce well spacing to 8 wells per section
• Cut completion back to 1500 #/ft and 1250 gal/ft

Step two: Reduce risk (~40% P10 production first 90 days improvement)

• Focus on Whiskey River area
• Minimal change to P50 oil predictions.

Step three: Preserve optionality (~$500k NPV/well improvement)

• Delay Wolfcamp B & C zones
• Preserves ~40% of inventory for higher-price future
• Minimal EUR degradation (7-9%)

With these changes, Parsley can reach IRRs of ~24% at $30/bbl, with per-well NPVs just under $3MM. Importantly, the plan we’ve laid out also protects against the downside, reduces the chance of catastrophic production misses, and preserves future upside with inventory prioritization and infill planning.