Fundamental Financial Analysis, page-31

Hi Auto,

Far be it for me to leap to the defense of these guys but I have to process the data as just data without bias.

One of the basic premises of shale is the near negation of geological failure. Unlike conventional oil exploration where the geological chance of success is around 1 well in 7, shale development well do have a near 100% success rate, especially in the core areas. When you get out to the margins they geological chance is still near 100% but the economics drop due to the much lower EUR and production rates.

So it comes back to what are working with. AKK provided the well production profile with 3 curves. I'm going to (at present) accept those as the long run probability typical type curves for development within the Pierre shale (the warning here is people talk about a "Bakken type curve" or an "EFS type curve" as if that curve defines the entire play - well it doesn't. Big operators might have dozens of type curves that fit the different aspects of their sets of acreage across the play and the well configuration they drill in them. You only need to look at various presentations to see the differences.

The most conservative investor, that believes in the data presented to them, would state it as follows:

There is a 90% chance that EVERY WELL drilled will produce at least 32,751 Bbls of oil (i.e. the P90 case).

You can argue with me here that I am bastardizing probability theory, but I believe I can make the following test case because I have been supplied with a long run average and a probability.

Each well is an independent trial (as in the results of one well do not influence the results of any other).
The variable (x) being tested is P90, with success case being the well exceeds EUR and failure means it does not (mutually exclusive and exhaustive). Of course this is difficult since you don't know the EUR until after 10 years, but the argument is the engineers can estimate that from initial flow rates.

This looks to me to be solvable as a binomial distribution problem. Yes??

So in the case where we have 3 wells,probabilities are
P(x) being at least 3 (i.e. all wells produce at P90 case) is 99.9%
P(x) being at least 2 (i.e. 2 wells produce at P90 case) is 97.2%
P(x) being up to 1 (i.e. only 1 (or none) well produces at P90 case) is 2.8%

If you look to the case where there are 9 wells, probabilities are
P(x) being at least 3 (so 3,4,5,6,7,8 or 9 wells are at P90) remains 99.9%

HOWEVER is you move up to the P50 case (which is the one I modeled upon)

P(x) being at least 3 (i.e. all wells produce at P50 case) is 12.5%
P(x) being at least 2 (i.e. 2 wells produce at P50 case) is 50%
P(x) being up to 1 (i.e. only 1 (or none) well produces at P50 case) is 50%
P(x) being 0 (all wells are below P50) is 12.5%

If you look to the case where there are 9 wells, probabilities are
P(x) being at least 3 (so 3,4,5,6,7,8 or 9 wells are at P50) is now 91%

Just out of interest, there is 99.8% chance that at least 1 well does not produce to the EUR (i.e. P(x)<9)

Tried to use the KISS principle here. Obviously a lot more variability possible but with that comes complexity.

Hope it helps.