Guest Editorial: Hundreds of Thousands of Stripper Wells - Massive Liability or Golden Opportunity?

Abstract

Working with clients who are looking to buy upstream oil and gas wells, I almost always hear, “We don’t want stripper wells.” Now that the recent heyday of US unconventional wells is also waning, this often goes along with, “We want conventional production.” With gas prices having been relatively low the past couple of years, it is often, “We want oil-weighted production.” I am used to unicorn hunts and impossible asks, so I thought this was something reasonably doable. After a long year in a terribly gridlocked acquisitions-and-divestitures (A&D) market, I started thinking about it a little more. Most of the conventional packages that were coming to market had low-rate wells with many inactive wells tagging along. We were evaluating a lot of deals but were seeing several fail due to plugging and abandonment (P&A) liability and the inability of low-rate wells to handle the General and Administrative (G&A) structure of clients. One client group was competent and ready to deploy capital, and we had gone on the hunt for off-market deals adjacent to their current production. Our team initially found 19 interesting assets, based on size and proximity, and was pleased to find that nine of the 19 had operators who engaged as seriously interested in selling. Our client turned down all nine assets. Every one of the nine assets was cash flow positive (surprisingly in 2020), in the right region, conventional, and the right size. Every one of the nine was turned down because of the large number of inactive and low-rate wells. In a depressed A&D market with the lowest deal counts in over a decade, having nine assets rejected immediately was frustrating. We decided to screen out assets with low-rate wells and high inactive well counts before making calls and engaging sellers. I downloaded data from all the wells in a Rockies state, screened for current production to get a flowing barrel comp range representing the right deal size, looked for oil-weighted properties, took out unconventional wells, added a rate cutoff around 20 BOED per well, and applied a cutoff where reported inactive wells made up less than 50% of the total well count. Out of about 400 to start with, there were three assets left - only three. At first, I thought that had to be wrong. I knew that US onshore conventional production probably had a large number of low-rate wells, but it seemed reasonable that there would be several assets that had wells doing 20–30 BOED. Thinking about it more, I sent a text to a colleague: “I bet US onshore conventional production is actually dominated by low-rate wells.” I then pulled data for the Texas Gulf Coast because I had another group looking there. The results were shocking: 97% of the wells were 15 BOPD or below. All these clients want conventional assets without stripper wells - but they are all stripper wells.