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  5. Capital

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- [Voiceover] Let's move into a different area now. Let's look at capital. And on the capital, we have kind of a different situation than we've ever had before, and it's really the scale of capital required to develop these properties. Recall back from a few slides what I'm showing here on the far left is that ideal development model a modest number of laterals across the section, three sections high. It's kind of your ideal situation where you're going to be drilling roughly twelve wells. On the far right side, I've taken a more aggressive bench development pattern where instead of doing a six across section model, you do a twelve across section model, which some of the operators are drilling out here. On the inside of each of those map views are kind of a cross-sectional view of what the section looks like out here. Remember I had been talking about earlier that we are actively seeing that shinking that stimulated rock volume leads to the practical development of more wells in a section. On the left side, you can see that we're developing a pattern there where we just simply have six wells, say in the Wolfcamp B, and then on the right side we have a twelve pattern with the radii of stimulation quite different in the two different cross-sectional views. In the one on the left side, there's not that much room available for interbench additional bench development. On the right side, it looks like it demands a much more dense interbench set of laterals. This is what I was telling you about earlier that is if the XRV's are going down, and the oil recoveries are going up, it also implies that your frac heights and lengths are going down. So the laterals across the section goes up and the potential number of laterals goes up. Now remember that the situation in the Southern Midland Basin right now is that the D Bench is already in mature development stage. And the A and the C Benches are in the early maturing stage. We are messing around with the Spraberry and the Clear Fork and the Cline in a lot of different areas. Clear Fork's the least developed at this point, but there's quite a bit of Spraberry going on. So, what does this mean for capital requirements in here? Well, what we generally are paying on, we with a number of our partners and a lot of the other operators out here, is a well-executed well is give-or-take, about $6 million to put on production. So if you were to go with that six laterals per bench model on the left side of that previous slide, you're looking at twelve development wells. You're getting $6 million BOE total reserves which is really pretty stout. A revenue stream gross of about $405 million and about $270 net million for a cost of about $72 million drill and complete cost with an additional of about $4 million of those centralized facility costs. That all doubles if your well density pattern on the right side of that previous slide and you're drilling twelve laterals. Now you get a step increase in your total reserves, which we think a lot of our partners and our competitors are seeing. It's real. You're going to be making more like 12 million barrels for again, roughly double the revenue, but at double the costs. And that's a single bench development pattern. Start thinking in terms of what we are actively developing right now. Most of the operators are doing either two or three bench simultaneous drill and stimulation patterns, but we are very regularly doing the B Bench. If we are in developing just a three section pattern, that's $76 to $152 million to develop. If we're doing a full three bench pattern, where we're doing A, B, and C Benches in there, we're somewhere at a quarter to getting close to a half a billion dollars for just a mere three benches on a mere three sections of land out in the Southern Midland Basin. I think this is a reality checkpoint where people have got to understand that when people start saying, "I can't do anything for less than 20,000 acres," they've really got to check their capital whole card. Are they serious about what they're saying? What I think sometimes people are is that they're just using old conventional reservoir logic from years of experience and not realizing that the capital required to get, admittedly good production out here, the capital requirements are just a different order of scale than what they used to be. And remember, we've got the Cline and the Wolfcamp B in immediate proximity that look like they should be prospective, and the Cline is becoming prospective in our area. And the Spraberry Benches are already in testing in some of our areas. And so, every time you add a bench, the amount of money just becomes more and more staggering under a mere three sections of land. I also want to make a little bit of emphasis on the timing scale changes that the capital requirements have brought on. When we're drilling out here, what I have on the upper left and upper right are development plans. On the upper left is what I'd call the ideal development plan. And then on the right is practical. Under the ideal, what you would do on that three sections of land is you would have outlined the benches that you planned to develop. And let's say it's a sold A, B, C pattern. The idea is that you would need to drill all those laterals and all your benches. You'd need to begin the fracs on the west side. You'd start the drill-outs on the next set of sections over. You'd come through and you'd finish your fracs. You'd drill out your plugs, and then you'd begin your flowback in that three section before you saw dollar one of cashflow return. That's because the benches apparently have some decent constructive interference between the benches. When you stimulate them all, you also avoid a lot of production interference when you have producing wells in a section and you frac new wells, you will end up washing out some of your production on the older wells. It comes back, but it does significantly disrupt production. The problem with the ideal plan, on the upper left is that it is so capital intensive that no one can do that. It's just not possible. So the practical development plan is to do three or six lateral sets at a time, and start producing your wells. Live with the production interference. Much less capital requirements and you get some cash flow. So what we're seeing is the upper right is how things are in reality done, but at the same time, look at the bottom set considerations. And to the capital provider's viewpoint, and when I classify capital providers, they come in all forms depending on what kind of company structure you are. They can be lenders. They can be equity participants. If you're in a larger company, then it's your corporate management. If you are in any size company where you've taken on foreign joint venture partners, then it's like a syn-OKIM, syn-OPEC, or any of the other myriad number of people that participate and bring equity. Their viewpoints are somewhat different from maybe what your viewpoints would be in the practical development plan. What they want is they want to only look at projects that are ready to start drilling tomorrow. They want to put as much of their capital to work as soon as possible, and they want to see cash, but kind of contradictorily, they want to see cash flow from all of that as soon as possible as well. They really like to take what cashflow they have invested and supplement it with bank financing to fund a lot of the development. They really tend to de-emphasize a lot of the research and development that's necessary for proper development in field simply because they're looking for the earlier return. And then, quite a few of these sources of capital will favor an early sell out just about the time you have figured out what you're doing right and what you're doing wrong. You'll have to move and start the whole process over again on another block. So, it can be very challenging to take ideal versus practical development plans and reconcile them with the captial expectations on the bottom half of the slide.