Business Breakdowns
· James Davolos
You need somebody who can guarantee that you are not going to be shut in on your well because you can't get rid of your water. So a company WaterBridge, so enter a third-party operator versus something that used to be just handled internally by maybe the midstream and marketing team who can say, look, I can guarantee your billion pad drilling plan if you're going to need 50,000, 100,000, even a couple hundred thousand barrels of disposal. Here's my injection wells, here's my pipelines and then okay, if this gets filled up, I've got these long haul pipelines to even take it out of the basin. So now you don't have to worry about something that A, could completely curtail your ability to produce, B, is getting increasingly expensive and prohibitive. I mean if you're paying a dollar a barrel to get rid of water and have 4 to 1 water cuts, it's $4 of your LOE and you're lucky if you're netting $40 in the Permian when you take into account the NGL and gas mix of that barrel. So it's a big deal. The point is third-party companies that specialize in doing this can guarantee that disposal and that flow, can do it in a way where you're not jeopardizing environmental or regulatory issues. Are now absolutely critical infrastructure points for the entire U.S. energy ecosystem.
· Matt Reustle
[00:00:00] S0: Yeah, it just feels like they're solving a pain point and removing one of the logistical things that a producer would need to worry about. I would imagine WaterBridge owns the infrastructure. Like you mentioned pipelines. There might be wellbores, but just talk about that. What infrastructure they have to own to facilitate this service and how are they finding ways to dispose of this? Is it just a network of wellbores from other producers? What goes into mechanics of them having the capacity to dispose of this.
· James Davolos
[00:00:00] S1: So going to be if you start at the life cycle, they need an ability to take control of that water at the wellhead which is operated by the E&P Company separate the skim oil. So a very small part of WaterBridge's business is there is some residual oil in that stream. But then the two critical parts of infrastructure is pipe. And so anywhere from 16 to 24 inch diameter pipe, just like an oil and gas pipeline needs to transport that. In some cases you're talking a matter of yards, in some cases you're talking hundreds of miles if you need to get it out of basin. So the next part is okay, you need land and in some cases you're just getting easements from third parties where you're paying an easement across their land. In other cases with LandBridge you own the land. And LandBridge obviously is a symbiotic relationship where they lease that to WaterBridge. But then a critical component after that easement is you then need the saltwater disposal well. And a saltwater disposal well is owned and operated by the company. As you can imagine when I explain these are pretty complex. You're drilling fairly deep. Even going into the shallower formation of the Delaware Mountain Group, you're still going thousands of feet deep. And this is pretty nasty waste products. So it needs to be encased in steel and concrete. And the WaterBridge of the world have a lot of technology to monitor that downhole pressure monitor to make sure you don't have leaks, monitor the flow rates. And so I guess to answer your question in a PP&E sense, your PP&E is the land, the pipe and the actual disposal wells themselves. But the limiting factor today, which is making it harder and harder, is the land. So the pore space and then the easements where there's any number of ability to drill these saltwater disposal wells. If you're—so for people familiar with Texas, if you're way out in the middle of Culberson County or you're up in the Panhandle in Crane County, sure there's plenty of pore space, but it's the ability to take a pipe and get it there. The areas around state line where New Mexico and Texas meet, it's very scarce. So having incremental disposal capacity there is incredibly valuable, as is the ability to have offtake, which is going to get it out of the basin.
· Matt Reustle, James Davolos
[00:00:00] S0: Yeah, I certainly get the offtake. I can understand the land side as well. And just to go back to what you were mentioning earlier, in this case WaterBridge, I know they're getting easements from LandBridge. If they're moving over that land, are they also leasing the land or using LandBridge's land? In the case of the wells themselves. [00:00:00] S1: It tends to be an all-in contract. So let's say I'm using, I don't know, a couple dozen of your acres and then I have a couple of SWDs on your acreage. It tends to be priced on a per-barrel basis, which is better than an easement because term easements tend to not be as lucrative. But we can get into the contract structures later. But you want to have that optionality around volume and pricing. And in this sense the landowners that are astute retain that.
· James Davolos, Matt Reustle
[00:00:00] S1: It tends to be an all-in contract. So let's say I'm using, I don't know, a couple dozen of your acres and then I have a couple of SWDs on your acreage. It tends to be priced on a per-barrel basis, which is better than an easement because term easements tend to not be as lucrative. But we can get into the contract structures later. But you want to have that optionality around volume and pricing. And in this sense the landowners that are astute retain that. [00:00:00] S0: Got it. I think you've given a pretty good rundown of the Permian, its importance to the overall industry, how it captures this idea of fracking in the US and how that unlocked so much resource that had previously been left behind before we really dialed in on the technology. In regards to thinking about that basin and the future dynamics there. I mean, I'll just lead off with a simple question, is it's very unique when it relates to shale oil, where you have very rapid decline curves. There's an incredible amount of oil produced from these wells. A lot of that is seen up front. From a time value money standpoint, that could be a good thing. But that means you need to drill more to maintain that production. Do any of these things as it relates to shale, and the unique dynamics of shale oil have an impact on WaterBridge when you think about the opportunity both medium term and then obviously longer term as well.
· James Davolos
[00:00:00] S1: Absolutely. And I think this is one of the biggest misperceptions around the business today is around that dynamic you mentioned is that decline rates on a traditional shale well might be 30% or more in your first couple of years and then pretty high thereafter. And then you kind of flatline into a much slower, more traditional decline rate. But that dynamic that people have cited is you the treadmill, where you have to keep drilling at an ever higher rate just to maintain production, let alone grow. It's different with water because maybe we'll introduce this concept of water cuts. And so a water cut is how much water comes out with the oil and gas. And when you first start producing a well, the water cut is actually at its lowest because you have a lot of that oil and gas going into the wellbore. But then after those really steep declines, your water cut gets higher and higher and higher as that well ages. And so despite the overall decline in volume of oil and gas of that well, what's actually coming out of the ground is very similar amounts of volume. It's just more and more water. There's almost a very stable rate to the water over the decades that that well produces. As the well ages, the water cut goes up. And so you don't have to have this treadmill just to maintain production. It's a much more long, stable, contracted stream of water. And that's why it's such a big deal. You drill one of these big wells, you're going to have a couple million dollar estimated ultimate recovery or EUR. You've got decades, maybe 30 years of water liabilities that you need to figure out. The other concept that's really important is people have been hypothesizing the end of the Permian based on this concept of high-grading tier one locations. So nobody's really defined tier one other than it's the lowest cost to drill. So once you go into Tier 2, it tends to be these deeper formations in the Wolfcamp. And why is it tier two? Well, maybe there's a little bit less oil in place, but it's also more expensive to extract. And it's not more expensive because you're going deeper per se. It's generally more expensive because there's more water. So as you see operators drilling into lower tier, lower quality, you're going to start seeing that 4-to-1 inch up to 5-to-1 to 6-to-1.