Published by: Oilfield Services, Volume 4 No. 3
West Virginia-focused upstreamer Cunningham Energy recently transitioned into an upstream-services hybrid through the acquisition of Pettey Oilfield Services to form Cunningham Oilfield Services. News quickly followed that the company was drilling one of the first horizontal shallow oil well in the state (vertical of 2,100 ft and measured depth of 5,200 ft), targeting the Big Injun Sand formation in Clay Co., West Virginia. The Cochran-6H well is one of three on the same pad, with the subsequent wells also expected to spud in February. In the company’s release, president Ryan Cunningham projected a “resurgence of the old oilfields our Grandfathers told us stories about in the past.”
PLS sat down with Cunningham for his thoughts on the company’s recent move into the service sector, shallow horizontal oil prospectivity in the region and broader outlook. Cunningham called the Pettey merger a strategic buy, saying the company had been a leader in horizontal shallow drilling and played nicely into Cunningham’s plans for horizontal.
He said Pettey had gone through the horizontal learning curve, and the company’s equipment was a good fit for Cunningham’s own and supportive of scalability. Cunningham now has four drilling rigs (having just closed on a fourth unit), eight service rigs and two swab rigs. His company’s operations are now roughly split between upstream and services, and expects horizontal oil to generate more opportunity for both segments.
Although the Cochran-6H well is being drilled on Cunningham acreage, the new service division is engaging in both in-house and third party work. Of the company’s remaining drilling rigs, two were already performing work for publicly traded regional majors, and the new fourth unit is already booked under a 1.5-year deal with a regional major. Bargaining power still lies with operators, but Cunningham did say there was some pricing power in the Huron shale for drillers and other service providers with experience in shallow horizontals.
As an operational aside, Cunningham said the company has stopped using major integrateds including Halliburton and Schlumberger for frac support, saying their equipment is geared toward zipper frac work on larger pads, and is generally too large to get onto the locations where Cunningham operates. Instead, it has turned to Producers Services and Patterson-UTI’s Universal Well Services for support. At Cochran, it will use a Packers Plus completion system.
Even though Appalachia is already bubbling with activity, Cunningham thinks horizontal oil has the potential to open things up in terms of market participants. He noted Marcellus economics just don’t work for smaller companies, with gas price fundamentals and the new West Virginia regulatory structure both working against the little guy. Permit costs for Marcellus wells have surged from $650 to $10,000, plus $40,000 in engineering costs and a $250,000 bond. And permit turnaround time has also skyrocketed from 10 to 80 days.
Meanwhile, Cunningham said ROI and cost per well should be significantly stronger than Marcellus gas wells. Old conventional oil acreage leases for as low as $10/acre, and both low production and the state’s lack of contiguous oil coverage have helped keep larger-scale and large-capital-deployment-loving operators at bay. Importantly, regulatory costs for shallow horizontal oil wells were not increased alongside their Marcellus peers, another important factor which should attract smaller operators.
Horizontal treatments similar to the ones Cunningham is currently undertaking have pushed Kentucky field production from 3-5 bopd to 100-400 bopd in some instances. On average, Cunningham said such wells have been coming in at 200-250 bopd. He expects a horizontal conventional oil boom and land grab in the region in about two years time.
Positioning for the projected boom, Cunningham said the company is in talks with a hedge fund for a significant, primarily debt, commitment pending the company’s first horizontal well. Cunningham has been courted on the equity side as well, but said he wants to avoid the associated ownership dilution. Demand from the company’s existing investor base for participation in the company’s Rhino project—which includes the Cochran well—has surged to such a degree that Cunningham is considering curtailing new investors.