By
Braden
Holt
:
There's no doubt that shale plays are sexy in the oil and gas
realm these days, but prudent investors know all that really
matters is return on investment. Valuations are high in South
Texas' Eagle Ford Shale, where private equity firm Kohlberg,
Kravis, Roberts & Co (
KKR
) recently
agreed to pay $25k per acre
in a participation agreement for up to 1/3 of Comstock Resources' (
CRK
) undeveloped Eagle Ford acreage. In North Dakota's Bakken Shale,
Bakken pure-play Kodiak Oil & Gas (
KOG
) paid
$11,800 per acre
in a deal late last year with two private companies. If investors
are looking for a value play, they should turn their heads to the
Mississippian Lime, where acquisition prices averaged $3,284 per
acre
1
during the past year.
(click to enlarge)
Source: Orion Exploration Partners August, 2011 Mississippi Lime
Presentation
The Mississippian Lime, located in South-central Kansas and
North-central Oklahoma (see map above), is a shallow carbonate play
(mostly Limestone) with depths ranging from 3,000' to 6,000'. The
Lime is not a new play, but an old producing field with more than
30 years of production and 14k vertical wells drilled. It's now
being redeveloped using horizontal drilling and fracking
techniques, and in that respect, could be compared to the Permian
Basin of West Texas. While conventional production in the play
stemmed from the "Mississippian Chat," a reservoir with high
porosity and permeability above the Lime, new development is
targeting the tighter Mississippian Lime that lies underneath the
Chat (see cross-section below).
Mississippian Lime Cross-Section
(click to enlarge)
Source: Range Resources Corporate Presentation
Because the Lime is shallower than the Bakken and Eagle Ford,
companies use smaller drilling rigs and cheaper proppants, which
has led to drilling and completion costs between $3 and $3.5
million, less than half of what an operator would pay in the Bakken
or Eagle Ford. The play is estimated to span 17 million acres with
oil in place estimates ranging from 5.4 to 5.9 billion barrels of
oil equivalent ((BBOE)). This impressive amount of oil in place has
companies like SandRidge Energy (
SD
) drilling three wells per section, which increases the recoverable
reserves in the play. For a more complete view on the Lime's
economics, let's take a look at its most experienced operator, the
aforementioned Sandridge Energy.
An intelligent discussion on the Mississippian Lime can't be had
without talking about Sandridge, which has drilled 382 horizontal
wells, or 44% of the total horizontal wells drilled in the play.
The company has amassed 1.7 million net acres in the Lime, from
which it expects to generate estimated ultimate recoveries (EURs)
of 456 thousand barrels of oil equivalent ((MBOE)) per well. These
EURs are based on 30-day average IPs of 275 barrels of oil
equivalent per day ((BOEPD)), or put another way, a well that
produced at an average rate of 275 BOEPD for 30-days is expected to
produce an EUR of 456 MBOE. How does this model out on a return
basis? SD estimates that a well which produces at a 30-day average
rate of 244 BOEPD will have an 80% rate of return ((ROR)), a solid
rate for a company whose average 30-day production rate is 325
BOEPD per well (119% ROR). The table below shows how SD's EUR
estimate in the Lime compares to those of operators in other
prolific plays in the U.S.
Play Economics
(click to enlarge)
1
Includes liquids content which prices at a discount to oil
As you can see from the table above, the Mississippian is by far
the cheapest formation to produce from with respect to the peer
group. It's worth noting that EOG Resources (
EOG
) and Continental Resources (CLR) are two of the premier operators
in their respective plays, and if you were to take a survey of
average well costs across those plays, I would expect current costs
to average between $7 and $10 million per well. The Mississippian
is a play that produces more hydrocarbons per dollar than any of
the above mentioned plays, with the main negative being a lower oil
cut. Despite its lower oil cut, SD is still reporting an average
rate of return of 119%, a rate that has plenty of natural gas
pricing upside. The Lime also gets oilier as you move from
East-to-West, and SD has reported several wells in Alfalfa County,
Oklahoma with 30-day production rates in excess of 2,000 BOEPD
(90%+ oil cut). So while it's a gassier oil play than some would
like, oil cuts vary and returns are high.
These numbers aren't going unnoticed by the oil and gas
industry, but have prompted industry titans such as Chesapeake
Energy (CHK), Apache (APA), Devon Energy (DVN), Encana (ECA) and
Repsol (REP) to accumulate large acreage positions in the play. CHK
has approximately two million net acres in the Lime, making the
play its top liquids play by acre, and a key component of its shift
towards liquids production. The company plans to run 22 rigs in the
Lime versus 30 in the Eagle Ford and 10 in the Utica during 2012,
meaning this struggling company has levered itself to these three
plays to resurrect its share price (down 73% from its high of
$69.40 in July, 2008) and pay down its high debt levels. Acreage
positions of other large caps in the Lime: APA: 580k, DVN: 545k,
ECA: 360k, and REP: 363k (see map below).
Range Resources (RRC) made its excitement for the Lime obvious
during its second quarter earnings call, affirming its decision to
market its Ardmore Woodford acreage to help finance the
acceleration of its Mississippian development. On the call, Jeffrey
Ventura, President and CEO of RRC, said regarding the planned
divestiture:
Although the rate of return in the Ardmore Woodford is very
good, the rate of return in our horizontal Mississippian play is
even better.
RRC's excitement stems from two gushers it recently hit in the
play, one which peaked at 1,363 BOEPD and a second which peaked at
1,950 BOEPD. The company hit these wells after modifying its
drilling and completion techniques by lengthening its laterals and
fracs to 3,468' and 17 stages versus 2,197' and 12 stages
previously. For that reason, keep in mind that this is still an
emerging play in its beginning stages with upside potential as
companies tweak their completions.
Who's where in the Lime?
(click to enlarge)
Source: Map data was prepared based on public data provided by
companies. Please note that this map is only meant to show the
acreage location of certain operators, and no precedence is given
to companies based on format or color.
The above map (prepared by The Energy Harbinger) shows where
certain operators own acreage by county. Because not all operators
have disclosed where they're operating, and some companies have
only partially disclosed the counties they operate in, this map is
incomplete. However, it does show the extent of the play and some
of the more popular counties. Net acreage by operator: APA: 580k;
Atlas: 7.25k; Chesapeake: 2,000k; Devon: 545k; Equal: 7.25k; HK:
45.28k; Range: 152k; Sandridge: 1,700k.
Now we know the big operators that are in the Mississippian;
however, there are plenty of smaller companies with large acreage
positions there too, including
Petro River
Oil
. This private company is interesting, not only because it has
amassed 100k net acres in the Lime, but because of its strong
leadership team. The company boasts two CEOs, Daniel Smith and
Ruben Alba, who combined have several decades of experience in the
oil and gas industry. Mr. Smith has experience growing companies to
maturity, serving as the Operations Engineer at XTO Energy before
it was bought by Exxon Mobil (XOM) in December, 2009. Mr. Alba
brings an extensive oil service resume to the company. Not only has
he spent the majority of his career working for Halliburton Energy
Services and Superior Well Services, but he also holds several
patents in completion technology. These Co-CEOs are supported by
Luis Vierma, who spent several decades at Venezuelan state-owned
oil and gas company
PDVSA
, where he served as the VP of Exploration and Production. Bottom
line, if there's a private company to keep an eye on in the Lime,
it's Petro River.
If one of the negatives on the Lime is its lower oil cut, a
second would be its high water content. Sandridge is reporting an
average of 2k to 3k barrels of water per day during the first
30-days of production per well. To efficiently dispose of this
water, companies must develop a network of salt water disposal
wells ((SWD)) which they will inject produced water into for
disposal in the Arbuckle Group formation (see Mississippian
cross-section above). While SWD wells add complexity to the Lime,
they are relatively cheap to drill (~$265k per well) and will
service water for between six and eight producing wells. If we
divide $265k by six (low end of estimate), we find that SWD wells
add roughly $44k in expenses per well.
What can we expect from the Lime moving forward? Companies like
Devon and Encana, who've recently added 400k and 220k net acres,
respectively, will be ramping-up production to delineate and hold
their acreage positions. The core of the play, lying in
South-central Kansas and North-central Oklahoma (see map above),
has been delineated for the most part, and has proven to be
consistent. While the extension area hasn't been delineated with
horizontal production, the area holds more than 7k producing
vertical wells and is an oilier field than the core. SD is
beginning to drill wells in the extension area of West-central
Kansas (see above maps), where it holds 900k net acres. The
company's initial extension wells are located in Hodgeman, Finney,
Ford, Gray and Ness Counties, and the company expects to announce
results from these wells later this year. Apache's entire acreage
position (580k net) lies in the extension portion of the play (see
map above), and its delineation will be important to pay attention
to. If SD's and APA's wells prove to be as economic as the core,
the land grab currently happening in the core will quickly spread
North, creating one of the biggest plays in the United States.
1
Based on the following four deals:
(click to enlarge)
Disclosure:
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours.
See also
Met Coal Falling Fast
on seekingalpha.com