Oilweek 2016 Producer of the Year: Painted Pony Petroleum punches well above its weight

Painted Pony Petroleum CEO Pat Ward. Photo: Shaun Robinson/JWN

Pat Ward likes to quote a New York investor when talking about production growth: “Nobody cares about the shoe you’re going to build in 100 years. Get busy, Pat!”

The president and chief executive officer of Painted Pony Petroleum seems to have taken that to heart.

In 2016 alone, the company vaulted its production to 40,000 boe/d from a first-quarter average production of 16,601 boe/d.

While Ward agrees that investors don’t care about 100 years from now, they do care about the near future, which is why Oilweek’s 2016 Producer of the Year has a five-year plan. It’s now heading into year three of that strategic plan, which will see Painted Pony elbow in to the senior producer ranks with its target of 101,000 boe/d by 2019.

Ward considers simply having a five-year plan to be an innovation in itself.

“It’s a really boring [innovation], but when we developed a five-year plan and published it, everybody thought we were crazy.

‘Who are those guys trying to kid? A five-year plan! Ha!’ Now you go and look, and you see that pretty much all of them have five-year plans—although some of them only go out three years. We also have a 30-year plan now! So we pride ourselves on planning."

There’s a lot more that Painted Pony can pride itself on. Like its prescient timing in offloading $100 million of Saskatchewan oil assets in July 2014 in order to make a strategic shift toward becoming a pure play natural gas producer in the mighty Montney.

“There was some weakness potentially coming in oil, but I never thought it would crash like it did,” Ward admits. “We knew we wanted to focus on the Montney, so we had to cash out [of the Bakken], and at $104, oil wasn’t about to go up much from that—for sure there was more downside risk.”

So at the start of 2015, Painted Pony had no debt on its balance sheet, drilling and services prices were in a free fall, and the company could now focus exclusively on developing its massive northern Montney in-place resource.

For a company with a market cap of just $850 million, Painted Pony punches well above its weight in proven natural gas reserves. Its 4.2 tcf is only surpassed by Canadian Natural Resources, Tourmaline and Encana.

“The Montney, where we are, is over 300 metres thick—in some place it’s up to 600 metres. We were the first guys to really test the upper, middle and lower, so all three zones, in the Montney. Then Progress, in their delineation, they did upper, middle and lower, and you started hearing other companies testing the upper, middle, lower further south.... We were pretty methodical about how we did it, and that’s why we built such a large reserve base,” Ward says.

Steps

Years earlier, when Talisman Energy drilled 13 wells on Painted Pony’s Montney leases under a farm-out agreement, those first wells cost $13 million to $14 million to drill, complete and tie in.

What Painted Pony learned from Talisman allowed it to start drilling at $8.5 million per well in its Blair-Daiber area. These wells came on production at between five mmcf/d and six mmcf/d, dropping to about two mmcf/d after a year.

That was pretty, especially since Painted Pony’s 199 net sections of contiguous land are west of B.C.’s deep royalty line, which provides an attractive three per cent during the royalty credit period and a sizable average $2.2-million credit per well.

But that was just the start for Painted Pony. It then swapped plug-and-perf completions for the Packers Plus open-hole ball drop system, which it used successfully in the Bakken.

“It was a bit of a gamble. A few people had used it in the Montney. They had some problems. But Packers Plus worked to make their system more rigorous for the higher pressures and bigger sand volumes, so we had no mechanical issues. Not only did we save money, but we got way better well results,” Ward says.

With plug-and-perf, Painted Pony wells now came on at about seven mmcf/d. After a year, they were producing three mmcf/d.

Next it tested what U.S. producers called a zipper frac, a technique that simultaneously fracs two wells by alternating the stimulation between parallel well bores one stage at a time until all the stages on both wells are fracked.

“We simplified this fracking process and fracked one well in its entirety. But rather than flow it back, we kept the pressure up and then immediately fracked the other well,” Ward explains.

“That frac sends shock waves through to the first well, and because it’s all tensed up with high pressure, a bunch of that energy also bounces back on itself, so you get somewhat of a double fracking effect between the two wells.”

Now Painted Pony’s Montney wells were starting at over eight mmcf/d and were still doing five mmcf/d a year later.

Across its land base, it has about 2,000 locations for wells like this.

Early days

If the message isn’t coming through: Painted Pony prides itself on innovation.

Its determination to squeeze the most from technology and progressive practices starts at the top with Ward, whose career reaches back to the early 1980s with Pacific Petroleums (a Pacific 66 company that was later bought by Petro-Canada). As a wellsite geologist, he saw petroleum geology across Canada, from northeastern B.C. to southern Ontario.

Later, with Total in the late 1980s, Ward saw the first horizontal wells drilled in the Midale Formation in Saskatchewan.

“That changed the whole dynamic of drilling for oil,” he says. “We were some of the early adopters of that technology when I was with Total, which became Rigel Oil and Gas.”

Then with NCE Resources Group, as a member of the Petrofund Energy Trust management team, at the turn of the millennium, he got an education in making deals. The company did about $1 billion of asset purchases over the four years he was there.

In 2003, Ward co-founded Chowade Energy, which was folded into Innova Exploration in 2004 because no one could pronounce Chowade. That’s Ward’s joke. The reality was a bit more complicated. Innova was then bought by Crescent Point, making for “one of those blessed moments,” Ward says.

“When Crescent Point decided to sell the B.C. assets that they got with Innova because they didn’t want gas, they phoned me up and said, ‘Pat, are you interested in that crap you bought when you were with Innova?’ I said, ‘Absolutely!’”

The rest is Painted Pony history. Initially short of funds, Ward built “one stick at a time.” He learned from others, bought Crescent Point’s gas assets by making that company Painted Pony’s largest shareholder for two years and generally ran a tight ship.

More

Of course there’s a lot more to Painted Pony than technical innovation. For example, it has a 15-year strategic alliance with AltaGas.

The midstreamer just completed its $430-million Townsend midstream complex, providing Painted Pony with 198 mmcf/d of shallow-cut natural gas processing capacity and the potential for future expansion on the same site in 2017 and 2018.

There’s also the impressive growth of Painted Pony’s liquids production, a projected 470 per cent increase between 2015 and 2017, and its arrangement to potentially benefit from AltaGas’ proposed Ridley Island Propane Export Terminal in the Prince Rupert area.

There’s also the contract with Spectra Energy for 220 mmcf/d of capacity on the T-North Pipeline and Painted Pony’s ability to market its gas through both AECO and Station 2 natural gas hubs. It has a strong hedging program with 65–70 per cent of its production hedged out to 2018 at prices where it can make money.

But all of that is really what you would expect of a company like Painted Pony. The innovation piece is just that much more compelling. So here’s what Painted Pony did after it figured how to get good wells.

By the end of 2015, services costs had troughed, so Painted Pony focused on finding the best economic returns per dollar spent.

“What my father used to bang into my head was that time was money, and in fracking a well, if we went over the day mark by four hours or six hours, 12 hours or whatever, we were charged $400,000 more—on some of these jobs, you’ve got 130 people on the lease,” Ward says.

When it scrutinized the number of stages it was fracking, Painted Pony concluded that by standardizing its fracs to 20 stages and no more, it could have 90 per cent certainty that fracking wouldn’t spill into a following day. An added advantage was that everyone knew exactly how much water and sand the would need.

“We also started to source our water closer. We built our own water collection pits on ranch lands near our property—so a dugout that Mother Nature filled with water in the area. Instead of trucking 60 miles one way, we were trucking two miles. Time savings and money,” Ward says.

“And we enlarged our leases so that trucks come in around a circle rather than backing in to unload. When you’re in the middle of a frac, there’s a truck entering the lease every 67 seconds, if you can believe that.”

While the industry, in general, continues to move toward bigger fracs with more water and sand, Painted Pony today uses about 20 per cent less water for the same type of frac it was doing two years ago. It also ditched the practice of an acid spearhead to initiate fracs. It just wasn’t needed.

Then it started drilling more wells per pad—four instead of two. Its wellheads are spaced just nine metres apart. That means rig release to the start of drilling on the next well takes just three hours instead of 12 to 18. At $100,000 for each day of drilling, that adds up. With wellheads are nine metres apart, frac trucks can also stay parked where they are. Instead of moving trucks, just the hoses are moved around.

Added up, Painted Pony’s 2016 development program economics reigned in well costs to $4.8 million to drill, complete and tie in. IP30 rates were 9.1 mmcf/d with 15 bbls/mmcf of liquids recovery. Wells paid out in 12 months and break-even costs were about $2/mcf.

“You’re truly getting into the manufacturing process,” Ward says.

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