In a world where only 5% to 10% of oil and gas projects are economic, Blackbird Energy Inc. (TSX-V: BBI), a junior E&P company, has just made two major discoveries that appear to fit into this small group of projects. With its condensate (high quality oil) and highly liquids-rich gas discoveries in both the Upper and Middle Montney intervals, Blackbird has significantly de-risked its oil & gas project that sits in a great “neighborhood” at Elmworth, Alberta, Canada. Over the last two years, Blackbird has established a very significant well inventory through its continuous land aggregation. With its execution to date, Blackbird has positioned itself to move from an exploration company to a producer in one of the most economic plays in North America, the Montney Shale play in Alberta, Canada.
Two Major Discoveries!
In a market where there has been relatively little to cheer for, Blackbird announced on March 4, 2015 that it had tested two Montney wells and discovered commercial amounts of condensate / liquids-rich gas in both the Upper and Middle Montney within its Elmworth acreage. The success of these two wells is very significant for the company. With gas prices collared (the price is held in a very tight range) due to the major gas production from the Marcellus Basin, Blackbird set out to find the extension of the over pressured (increased pressure region of the Montney) liquids-rich Montney at Elmworth. It is the high liquids content per million cubic feet of gas (greater than 75 barrels of liquids to a million cubic feet of gas) that makes this resource work from an economic standpoint. The condensate that is produced receives a premium to the price of oil (usually in the amount of +10%).
These two discoveries de-risk a significant portion of Blackbird’s 100% owned and operated land position that now sits at 44,160 acres (69 sections), which in itself is large for any sized company, let alone a junior with a sub $125 million enterprise value.
Middle Montney Discovery
In the Middle Montney, after recovering only 21.7% of the 97,500 barrels of load fluid pumped down-hole during the completion, Blackbird produced 1.36 mmcf/d and 181 bbls/d of condensate over the final 48 hour test period, for a total of 407 boe/d. While those figures will not set any records, it is critical to understand that this test was performed with a 15/64 inch down-hole choke, which was placed due to infrastructure constraints. For clarification, that is a choke with a diameter of less than a quarter of an inch, resulting in a bottom-hole pressure of 19,440 kPa during the test period. On production, the company would not run such a significant down-hole choke. At a realistic surface flowing pressure of 2,100 kPa and a down-hole pressure of 15,240 kPa, we calculate that the well could produce at approximately 3.14 mmcf/d of natural gas and 417 bbls/d of liquids, for a total of 941 boe/d, representing a liquids to gas ratio of approximately 133 bbls/mmcf. This is a significant discovery indeed. As a caveat, this is purely a forecast for what this well looks to be able to accomplish and furthermore this production test is extremely early and the best data will ultimately be known once this well is cleaned up and on production for a set period of time.
Blackbird’s Middle Montney well was drilled and fracked into a 100 ft. interval of the 660 ft. thick Montney at Elmworth. The Middle Montney discovery well for Blackbird is very similar to wells that have been drilled in the last year by NuVista Energy (TSX:NVA), an industry leading intermediate producer which has lands to the south and south west of Blackbird’s project. One particular well that was drilled only 10 miles to the southwest of Blackbird’s land was NuVista’s best liquids rich well to date, producing over 128 barrels of condensate per million cubic feet of gas (bbls/mmcf) – along with 1.8 mmcf/d on a highly restricted 30 day production timeframe. Based on current commodity prices, this type of well would have an approximate net present value of $3.3 million with a 10% discount rate (based on industry type curves for recent liquid rich wells drilled in the last year), which showcases the robust economic nature of this type of well.
Upper Montney Discovery
Blackbird sequentially completed a second well targeting a 100 ft. Upper Montney interval that produced 341 bbls/mmcf and 0.9 mmcf/d on test over the final 48 hour test period, after recovering only 32.3% of the 86,800 barrels of load fluid pumped down-hole during the completion. This well is located in close proximity to where Encana Corp (TSX: ECA) has drilled over 50 wells, just to the west of Blackbird’s land. The Upper Montney well has tested even more liquids rich than the Middle Montney well that Blackbird drilled. The significant liquids that were recovered during the testing of the well could potentially be more valuable than the dryer, yet still significantly liquids-rich Middle Montney well.
Garth Braun, Chairman, CEO and President commented in Blackbird’s well results news release “After completing considerable technical analysis, it is our view that these Middle and Upper Montney wells behave similarly to some of the most commercial analogue offsets in the region”.
Though early in the testing phase of both of these wells, and still not on production, the results shown to date prove up the commerciality of oil and liquids-rich gas on Blackbird’s land.
De-Risked Oil Resource in a Great Neighborhood
In the Elmworth corridor of the Montney, Blackbird does not sit alone. It is in fact surrounded by industry leading major and intermediate-sized oil and gas producers that are aggressively delineating their land positions at this moment. Encana Corp. (TSX: ECA), Canadian Natural Resources Ltd. (TSX: CNQ), NuVista Energy Ltd. (TSX: NVA), Apache Corp. (NYSE: APA), Royal Dutch Shell (NYSE: RDS), Birchcliff (TSX: BIR), Paramount Resources (TSX: POU), and Kelt Exploration (TSX: KEL) are some of Blackbird’s neighbors, and they all have been busy drilling their land in close proximity to Blackbird’s land.
Blackbird’s discoveries add a significant amount of value through connecting the geological dots that link EnCana’s wells to the west, one of them being two miles away from BBI’s land, and Canadian Natural Resources’ well five miles away to the northwest, in addition to the four wells that have been licensed by Shell and Apache six miles to the south of Blackbird’s lands. Encana, a true industry leader, has significantly de-risked Blackbird’s lands and validated the highly economic and deliverable nature of the condensate and liquids-rich gas in the region.
With Blackbird’s two discoveries, the region has now been significantly de-risked from an economic deliverability standpoint. The scale of these two discoveries in the Upper and Middle Montney represent only one third (200ft of 660ft of total pay) of the potential of the Montney Shale play in this area.
The value of the resource in the region will likely continue to expand as Blackbird steps out and drills low-risk wells closer to Encana to the west, CNRL and Kelt to the North, and Apache/Shell to the south. This company is still at the beginning of its evolution and has a number of more catalyst events ahead, and as the company further delineates the Montney throughout its Elmworth project (as per the company’s AGM presentation), there stands to be material value creation in the year ahead.
A very significant Well Inventory and Scale of Asset
As with all unconventional resource plays (the rock acts as both the source of the resource and the trap), the Montney’s 660 ft. thick pay zone at Elmworth allows for scale and repeatability. Through its initial drilling, Blackbird has now shown commercial amounts of condensate and natural gas in two zones (Upper and Middle Montney). Birchcliff Energy has indicated that there could be up to five or six intervals in the Montney and further delineation of the Montney on Blackbird’s land would increase the potential well locations through de-risking each zone. The Montney is a substantial resource and the entire pay zone is charged with hydrocarbons (meaning all the Montney rock has oil and gas embedded inside of it).
Blackbird announced on February 26, 2015 that it had acquired an additional 12,160 acres of land (19 sections) representing a 41% increase in total acreage in the area. The reason for this acquisition pre-results, we assume, was that Blackbird wanted to ensure that they locked up the acreage before others saw the well results, and they wanted to add crucial inventory and scale to the asset. At this time, Blackbird only talks of three pay zones. As it continues its delineation, they will most likely begin to speak of additional zones. At this time, using a conservative four wells per section and three zones (as per Blackbird’s presentation), there is approximately 828 drilling locations over Blackbird’s 69 section land position.
Aggressive Land Aggregation in Full Swing
As mentioned above, Blackbird announced on February 26, 2015, just prior to announcing well results, an increase of 19 sections (+41%), all near or contiguous with its western land acreage. Blackbird’s constant and aggressive land aggregation model continues to add significant value through low capital cost (<$100,000 per section as per the companies AGM). Over the last year Blackbird has increased its acreage by 228%. The company continues to focus on both aggregating lands and proving up the resource. Mr. Braun stated in the March 4, 2015 news release “Based on these results, it is our plan to continue forward with the aggressive delineation and development of our Elmworth project, beginning with the design and construction of a battery, which we anticipate will allow for tie-in by the first quarter of 2016.”
The oil and gas market has been in survival mode since the commodity price roll back, but in every correction opportunities do in fact exist. This liquids-rich Montney play at Elmworth, where companies such as Encana, Shell, Apache and Blackbird all co-exist, stands as an outlier. Where 95% of oil and natural gas projects don’t work at current commodity prices, Elmworth is still economic to drill and produce – it is no wonder it is such a great neighborhood.
By. James Burgess of Oilprice.com
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