Investors are pressuring producers to maintain capital discipline, consequently many companies must alter their development strategies to operate within this constraint. While some operators in the Permian are moving to larger pads in hopes of realizing cost efficiencies to enhance value from a full-cycle perspective, others are focusing on single-well performance returns to boost near-term cash flow. In either case, go-forward spacing assumptions are changing for most operators in light of recent pilot results. This means, when valuing future development, it is crucial to align development type curves with operator spacing assumptions.
With spacing assumptions evolving rapidly in the Permian, using a company’s recent well performance to forecast future value can often result in material errors in value estimations. As examples, PE is moving towards wider spacing to improve capital efficiency and asset value at its planned activity level at the expense of inventory depth, while HK is attempting to prove up dense multi-zone development in sparsely-drilled areas to appeal to investors and potential acquirers. RSEG expects performance uplift through widening of spacing and, conversely, performance degradation through downspacing, all else equal. This means recent well productivity may not reflect the future trajectory of an asset.
Figure 1 illustrates the potential valuation gap in net present value (NPV) for a development project that can arise when downspacing-related performance degradation is not accounted for in type curves. Utilizing RSEG’s proprietary spacing data and analytics to assess impacts of spacing on well performance, investors and producers can properly underwrite assets with empirical data and analysis rather than simply relying on operator estimates.
FIGURE 1 | No Degradation vs. Degradation from Downspacing
Source | RSEG
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