Buzzico exclusively purchases State and Federal oil leases in Wyoming and Colorado.
Here’s why:
While everyone else has been looking east, and south to the Gulf Coast and onshore Texas, Colorado and Wyoming offer the most interesting opportunity in the current (and long term) position of the oil market.
It is important to note that the sweet crude from Colorado and Wyoming is of very high quality—closer to Brent than WTI. (Brent traditionally sells for 15% more than West Texas Intermediate) Furthermore, a large percentage of producing wells also include natural gas as a bonus. You are paid on all hydrocarbons produced on your lease.
1. Sweet high quality crude
Requires less processing (thus less cost) than WTI.
2. Better infrastructure
Decades of oil production in the Rocky Mountains makes it cheaper to transport oil and gas to refining facilities. (less overhead)
3. Lower production costs
In fact, Colorado and Wyoming oil production during the downturn was still up— a vertically or horizontally drilled well with its quality of crude (and natural gas as a bonus) was profitable at $30 to $35 oil due to lower production costs and higher quality product—while other parts of the country and the world required $70 to $85 oil in order to drill new wells replacing older, existing wells that were nearing the end of their life cycle.
The Opportunity…
When oil prices were high, oil companies were not quite so motivated to pay high prices for super-premium leases. Their business model (with tax breaks) made sure they would make money and be profitable with less costly leases. But now, these premium leases are in high demand, easy to resell and command a higher premium up front. The result for the savvy investor is lower risk and a higher return.
Where is oil going?
The professionals still see oil at $55 to $75 a barrel over the next five years. Keep in mind that replacement cost for depleted wells internationally require $70 to $85 oil.
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Even though over half the oil rigs in Colorado and Wyoming shut down when oil prices fell, Colorado oil production in 2014 was up over 44.3%. By 2017 Colorado production was up to 128,151,000 barrels of oil.
The provided chart by the U.S. Energy Information Administration demonstrates the yearly production over the past 27 years.
WHY OIL LEASES IN COLORADO & WYOMING ARE THE BEST VALUE
The Physical
Again, Rocky Mountain oil in Colorado and Wyoming is much closer to Brent than West Texas Intermediate. It is a light, sweet crude that requires less processing (and thus less cost) than WTI. In addition, many wells have large reserves of natural gas which not only offset cost but add an additional profit to the wells. Also, the infrastructure of decades of oil production in Rocky Mountain basins makes it cheaper to transport the oil and gas to refining facilities. Finally, the cost of drilling in the limestone and sandstone formations of Colorado and Wyoming is considerably less, especially in comparison to offshore operations in the Gulf. Basically, higher quality, less cost, more profit.
A replacement well in the Rocky Mountains can be still be profitable at $35 oil whereas the global break-even average for replacing exhausted hydrocarbon fields requires crude prices of $60 to $85 dollars a barrel.
The Strategic
One of the reasons that Colorado and Wyoming operators are still making significant profits even with lower oil prices is that savvy oil companies have changed their method of operation to reflect current conditions.
These companies have cut back on rank wildcatting. They are no longer using Landmen to go out and gobble up potential leases from landowners and government auctions just to acquire territory.
Their strategy has become targeted and surgical. Their objective is to mitigate risk and maintain profitability by eliminating speculation and wasted effort. They are doing this by purchasing and drilling newly released State and Federal leases that are in close proximity to existing wells with proven production.
This can become a very delicate jigsaw puzzle as major oil companies need to keep their strategies as private as possible until all the pieces are in place.
The demand for proxies
Because of the necessity for major oil companies to keep their strategic information private and confidential, there has become a growing demand for credible, discreet buyers or proxies to bid and purchase "hidden asset" leases at government auction. The reason is simple. If a major oil company makes known their interest in a specific lease never before available and now up for bidding, their competition will immediately be alerted to its value and a bidding war will frequently ensue, driving the price up by thousands of dollars an acre. In order not to "tip their hand", a proxy buyer is a valuable asset.
Proxy buyers save money for oil companies
Proxy buyers like Buzzico actually provide a buffer for oil companies who want to avoid going head to head with their competitors and wasting their budgets on bidding wars. Additionally, proxy buyers preserve an oil company’s cash reserves by deferring hard cash expenditures upfront.
Example:
Once a lease is purchased at auction, there is generally a waiting period of one to two months before it is issued by the State or Federal Government. That means hundreds of thousands of dollars tied up that is vital for the needs of the company. Not to mention the fact that they can further defer a cash outlay by acquiring the lease now and not having to pay for it up front. Instead, it gets paid out in royalties from cash flow generated by actual production of the lease.
Buzzico, through its consulting relationship with R. C. Michael Company has developed strong working interactions with many of the major players in Colorado and Wyoming—evolving and adapting its business model to benefit clients and oil and gas operators.
There are three major factors Buzzico considers before bidding on any oil lease:
1. Proximity to existing production…
When a government lease becomes available near successful producing horizontal wells—it immediately becomes more valuable as the success rate of drilling a new well automatically increases. The higher the production of adjacent horizontal wells, the greater the potential for profit on your lease.
2. Successful horizontal production on any new lease…
If there is successful production on more than one side of a new lease (north/south/east/west) then there is a greater potential for highgrade production and multiple well sites.
3. Pending horizontal drilling permits…
The advantage of purchasing a lease next to an adjacent already permitted horizontal drilling project immediately increases the value of the lease, as well as making the lease more attractive to the adjacent drilling company or its competitor.
Because State and Federal land is only offered for mineral exploration in small parcels over time, there are many valuable drilling sites adjacent to proven wells that have never been available to the industry. So, new leases near existing production are continuously showing up in the auction lists.
In addition, our geologist looks for the following:
1. The basic geology of the parcel, as shown on geological maps;
2. The proximity to existing production and drilling activity;
3. Significant initial production volume on at least one side of the parcel— preferably on two or more sides;
4. Current leasing activity in the vicinity of the parcel and the level of competition for leases;
5. The more oil companies that are active in the area—the greater the potential marketability of the lease.