Energy Market Commentary · August 2, 2018

Powder River Basin – Wyoming Oil on Growth Trajectory



As producers expand their drilling portfolios to take advantage of high oil prices, some companies have been looking to the Powder River Basin (PRB) as a potential onshore oil opportunity.  Production in the PRB is approaching 140 Mb/d, last reached in 2015, and accelerating growth could be on the way.  Anadarko (NYSE: APC) recently announced an acreage position in the PRB totaling 300,000 acres for less than $2,500/acre, which could be considered a value play compared to acreage costs in areas like the Permian. Specifics will be provided later this year, but Anadarko indicated it will focus on the Turner formation and expects oil cuts greater than 80%. Chesapeake Energy (NYSE: CHK) has also announced intentions to increase PRB activity with plans to double current production of 35 Mboe/d in 2019.

Current CHK and APC production is focused in Converse County, WY, where Devon (NYSE: DVN) and EOG (NYSE: EOG) have driven the bulk of production gains over the last 18 months. CHK has indicated they could add up to two more rigs, which could help the growth trajectory continue.

BTU Analytics forecasts overall PRB growth over the next couple years, but emerging details on CHK and APC could add additional upside to the outlook.  The chart below shows BTU Analytics’ total PRB forecast along with potential additional production if Chesapeake and Anadarko move forward with their growth plans. The potential growth volumes were calculated assuming 2-3 rigs were added in 2019 between the two operators resulting in an average of 4 additional wells per month to the forecast.

From the 4th quarter of 2018 through the following year, this additional activity in the PRB could result in approximately a ~20,000 b/d increase versus the current forecast and push the PRB to over 175,000 b/d in 2019. There could be additional upside risk to production depending on what details emerge from Anadarko’s 2019 capital budget, and because the new wells could have higher IP rates than the current basin average.

Both Anadarko and Chesapeake have indicated they plan to target the Turner formation within the PRB. The reason why becomes more clear when you look at the economics of the Turner versus the overall basin as shown below (The following data comes from BTU Analytics’ E&P Positioning Report). Calculating the percentage of wells that break even under $70/bbl (3-month average WTI price), 90% of all Turner wells in the dataset break even below $70/bbl in 2017 compared to only 75% of all PRB wells. High oil IP rates have helped drive these results as well as falling well costs for operators like Chesapeake who have seen a 50% reduction in overall well costs since 3Q 2017.

At this point, oil takeaway capacity is not a constraint, but if the area grows significantly beyond BTU’s current forecast, utilizations could begin to run high. Will transportation bottlenecks emerge like we have seen in the Permian? For more information please see BTU Analytics’ Oil Market Outlook Report.