In the oil and gas industry, longer is sometimes better, as is the case for wells in the DJ Basin. By extending the horizon reach of their wells, oil and gas companies can become more profitable for just a tiny bit more cash upfront. By increasing the length of the lateral, E&P players are drilling down to roughly the same depth, but the horizontal reach of the well is extended to expand margins. Noble Energy Inc (NYSE:NBL) has updated its drilling program for this year, and investors should be excited. By shifting toward longer laterals, Noble is more than doubling the return on some of its wells.
Expanding the horizon to generate more cash
For $4.3 million, Noble Energy can complete a well in the DJ Basin with a 4,000 foot lateral. Dubbed a "normal" well, these wells yields an estimated ultimate recovery, or EUR, of 305,000 barrels of oil equivalent, abbreviated as BOE, for a before tax rate of return of 87%. By spending an additional $3.4 million, Noble Energy can bring a "long" well online that yields a 750,000 BOE EUR by having a 9,000 foot lateral, and has a much higher before tax rate of return of 188%. "Medium" length wells also yield a slightly higher return of 97%.
Spending an additional 80% to drill a long well that produces 146% more hydrocarbons seems to be the right move for Noble. The promise of this realization has been clearly reflected in Noble's updated drilling plan. Previously, Noble planned on drilling 262 normal wells, 28 medium wells, and 30 long wells, which combined would have a total lateral length of 1.59 million feet, equivalent to 365 normal wells. Now Noble plans on drilling 191 normal wells, 30 medium wells, and most importantly, 66 long wells for a combined lateral length of 1.62 million feet or 369 normal wells.
To get an idea of what that does to Noble's financials, investors should look at what its new plan will do to its before tax rate of return. Its original plan had wells that would on average yield a return of 97.3%, while its updated plan would improve the average return on its wells to 111.3%. What makes this even better is that its new plan costs just as much as its original, while generating more cash flow.
The DJ Basin isn't the only shale play that Noble is extending its reach in. In the Marcellus, through its joint venture with CONSOL Energy Inc (NYSE:CNX), Noble Energy will attempt to target multiple liquids-rich intervals through longer laterals.
From one play to several
In the Marcellus shale, Noble operates in the liquids-rich part of the play while CONSOL Energy operates in the dry portion. When CONSOL and Noble formed the joint venture back in 2011, the average lateral length was 5,000 feet and the only play being targeted was the Marcellus. Since 2011, Noble has increased the lateral length of its Marcellus wells to 7,000 feet, with plans to push that up to 10,000 feet.
Future wells will not only be longer, but they will also tap into multiple plays, not just the Marcellus. Longer laterals will tap into the Oxford, Pennsboro, and Shirley horizons, with Noble planning on drilling several test wells in the Burkett. Opening up new plays will complement Noble's downspacing test projects.
Currently, Noble has been able to reduce the space between wells to 750 feet with no communication, with plans to test out 500 feet spacing through several downspacing pilot projects. No communication means that at 750 feet, wells weren't interfering with each other's production. If successful, Noble will be able to bring more wells online in the same amount of space, allowing it to bring liquids-weighted wells online in other parts of this mostly dry gas play.
Drilling longer laterals is doing more than just expanding margins, it's opening up new opportunities for Noble and CONSOL. While still in the testing phase of this plan, Noble and CONSOL are going to have effectively doubled the lateral length of their wells from 5,000 feet to 10,000 feet over the span of three years, which will give both operators a much larger liquids-oriented drilling inventory.
By drilling longer laterals in the DJ Basin, Noble Energy is spending the same amount of money to generate much larger returns, and investors will be greatly rewarded. Noble's updated drilling plan provides it with a solid runway of production growth throughout 2014, which can be replicated for years to come. In the Marcellus, CONSOL Energy seems to have picked a strong partner in its quest to shift away from coal. By teaming up with Noble, CONSOL is able to take advantage of Noble's ambitious plan to tap into other liquids-rich intervals in what is mostly a dry play. Longer laterals are providing a more profitable horizon for Noble and CONSOL, with extended laterals being the way of the future.
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Callum Turcan owns November 22 call options for Noble Energy. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.