Allaying Cardium Inventory Concerns

On the hunt for sustainable value creation at a discounted price.

Thomas Matthews, CFA, P.Eng.

From 2016 through mid-2018, the Willesden Green and Ferrier Cardium trends underwent a renaissance as producers began using new drilling and completion techniques to unlock virgin reservoir surrounding conventional Cardium production. By drilling longer laterals, using higher pressure frac equipment, and increasing the proppant placed in the reservoir, operators grew production by over 40% in the area, while PDP NAV10 values and share price performance appreciated for select names that captivated investors’ attention. As a result, the buzzword “bioturbated” was born and became commonplace in investor meetings, AGMs and quarterly reports. Investor sentiment on the play degraded in mid-2018 as the variability of drilling results led investors to question reservoir quality, type-curve consistency and whether or not companies were overcapitalizing the resource in place. This, along with ongoing volatility in Alberta-based commodity pricing and apathy towards Canadian junior to intermediate conventional oil and gas producers, has resulted in the opportunity for investors to access a reservoir that is economically competitive with any top play in North America, at all-time low valuations, with a deep inventory.

Our analysis includes an in-depth look at the reservoir trends in the Wilson Creek, Willesden Green and Ferrier areas in West-Central Alberta and includes the following:

  • Historical initial production trends and the evolution of gas-oil ratios
  • The evolution of costs and drilling and completion techniques
  • Productivity drivers and the correlation of lateral length, proppant placed and frac spacing
  • Mapping of the focus area into four stratigraphic units from >1,000 well logs
  • Calculation of original-oil-in-place and recoverable reserves
  • Generation of six type-curves—two conventional, three halo and one bioturbated
  • Calculation of remaining inventory, recoverable reserves and potential unrisked value for
    companies in our study area

The conclusion is that investors are often more concerned with absolute well inventory numbers, and overlook inventory quality and relative economics as the latter requires a much more in-depth asset-based review. Looking at the three most profitable type-curves in our analysis, all of which have IRR’s >60% and profit/investment ratios >1.3x on our AltaCorp price deck, we calculate 1,547 remaining locations—a meaningful resource play for a wide array of market cap sizes.

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