Two Times The Oil Per Acre

It’s possible that you haven’t yet heard about one of the biggest trends in energy exploration.

It’s not fracking or horizontal drilling. It’s something completely different. And it’s helping oil and gas companies in the U.S. find more oil on each acre they own.

It’s called “downspacing.” And it’s one of the engines driving oil and gas stocks higher.

What is downspacing? It’s an oil industry word that means drilling more wells in a given area. It’s a hot trend because it’s helping some drillers double, triple and even quadruple their drilling inventory, without buying more land.

Think about it like this…Some oilfields are like a bowl of water. If you add more wells, you’ll drain the oil faster.

But some oilfields are like an ice cube tray. You can’t empty one cube by tapping the one next to it. You have to get to each cube individually.

Right now the industry is trying to figure out which oil fields are like bowls of water, and which ones are like ice cube trays. One of the ways it is sorting this out is by incrementally drilling wells closer together. And this is known as downspacing.

The goal is to maximize the amount of oil recovered without one well interfering with the recovery of another well.

In some areas, like the Permian and Eagle Ford in Texas and the Wattenberg in Colorado, geologists are finding that a lot more wells can be drilled in a “section” – a surveying term equal to 640 acres.

Let’s look at a specific example from PDC Energy (NASDAQ: PDCE), one of my favorite companies drilling in the Wattenberg.

In 2011, four horizontal wells per section was the standard.

By 2012 that doubled to 8 wells per section … and this year PDCE is experimenting with 16 horizontal wells per section.

So far, it hasn’t reported any interference from the extra wells. It’s possible that even more wells in the same area will be economically feasible.

What this means is that each section can generate much higher returns than expected just a few years ago. Drilling 16 wells per section effectively generates 4-times the returns of just four wells per section.

This is a huge step forward and one which opens the door for higher returns and more drilling than previously expected.

PDCE and other drilling companies are still trying to figure out the perfect spacing. Every oil basin has its own characteristics. We’ll learn more as more drilling results come in.

In more established plays like the Bakken, standout performer EOG Resources (NYSE: EOG) has found that in some sections it achieves the best returns with 16 wells. That density helped it to nearly double its drilling inventory to 12 years, without having to buy a single additional acre.

The optimal well spacing in the Wattenberg, Permian and Eagle Ford isn’t yet known. But based on the trend, it’s likely to be far more than though possible just a year ago.

That means companies operating in these plays are likely to achieve higher returns without having to buy more property. That will boost profits.  And all else being equal, that should help keep these stocks moving higher. If you’re interested in learning more about my favorite oil drillers you can access my research reports here.

Good Investing,

Tyler Laundon

Newport, Rhode Island

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