This paper presents the results of an economic modeling project to determine the economic value of a multi-well shale drilling program. A model was constructed to simulate a multi-year 200 well horizontal drilling program, and to enable a deterministic evaluation of the drilling program in terms of the customary yardsticks of Net Present Value, Return on Investment, etc. This model served as the basis for a evaluation of the drilling program. Both the deterministic and stochastic models of the drilling program were used as an input to a financial model of a small hypothetical public company producing approximately 9,000 BOEPD before the commencement of the shale drilling program. This small hypothetical company should be seen as a benchmark company as it represents the average financials of a typical E&P company after aggregating the assets, liabilities and income statements of 14 junior U.S. E&P companies with a similar size in terms of production volumes. This linkage of the drilling evaluation model to the financial metrics of this benchmark company measures the impacts of the drilling program on the company's financial performance and NAV valuation. The resultant model and the performance of a sensitivity analysis of the various model uncertainties on the company's financial performance and equity valuation is a major technical contribution of this paper. The paper also compares the financial results of drilling in the oil, wet gas and dry gas legs of a shale play, examining the effects of the initial production rates, decline rates, development efficiency and price variability on the financial metrics of the company and the specific capital requirements. A second technical contribution of the paper is to illustrate the usage of the model including stochastics to determine the optimal development path for the reservoir in order to maximize the benchmark company's financial metrics and NAV valuation, by comparing a best case development vs. a less optimal development path.
When assessing the economic value of a drilling program for a specific resource play (using both deterministic and stochastic decline curve models), previous analyses have mostly focused on the question how much value can be generated at the individual field development level of the play (measured by customary yardsticks such as NPV and return on investment). This in turn has focused on the production metrics of the play, with a great deal of attention paid to how to characterize the production history, and more importantly, to forecast future production, with the resultant reserve projections and financial metrics dependent on the type of decline curve chosen and the value of the variables that define that decline curve. This paper includes an additional layer of analysis by examining how much shareholder value is generated at the company level (in terms of equity value per share) when determining the optimal development path that extracts the most value at the resource level (derived from a stochastic evaluation of the drilling program). This paper quantifies the importance of the various parameters to shareholder value creation and analyzes the link between a pure economic resource evaluation and how to maximize the shareholder value of an E&P company.