In the coming weeks, we’re going to detail all the potential candidates, but we’re starting out with what is hands down THE next venue to play, why we believe this to be true and where to put your money.
We take you to the eastern flank of the Permian Basin in Texas where by all analysis there is 30 billion barrels of recoverable oil buried in the shale. This is the Cline Shale, and trust us when we say it’s the hottest place to be right now outside of Bakken and Eagle Ford. In fact, we think it will end up dwarfing them.
This isn’t an IF, it’s a WHEN. By the third quarter of this year, the rush on Cline will already have started in earnest with a massive drilling campaign, so if you’ve been slow to catch on to Cline, now is the time to shift into fifth gear.
The interest in Cline began to mount about this time last year, and Shell and Chevron, who had abandoned the area a while ago—before the hydraulic fracturing boom—are now itching to get back.
Cline Could Blow Bakken and Eagle Ford Away
First let’s look at the windfall that has been Bakken and Eagle Ford. This is mind-blowing in and of itself. For Texas, the economic impact from Eagle Ford alone was $61 billion in 2012. Simply put, Eagle Ford was THE biggest oil and gas revolution of 2012—on a global level.
Now let’s look at the oil figures, and this is where it gets really interesting:
• Bakken—4.3 billion barrels of oil
• Eagle Ford—10 billion barrels of oil
• Cline—30 billion barrels of oil!
The Geological Picture
The Cline Shale is also referred to as the lower Wolfcamp, to avoid any potential confusion. It is part of the Permian Basin.
The upper and lower Wolfcamp blankets the Permian Basin and has served as the source rock for conventional production. The entire Wolfcamp formation straddles 30 counties in West Texas and lies up to 9,000 feet below the surface. In some areas the formation is up to 2,000 feet thick, and overall, it is the thickest onshore shale play in the US. We’re talking about up to 1,000 feet of potential payout across hundreds of thousands of acres according to geologists.
The Cline shale layer—or the lower Wolfcamp--is about 9,000 feet deep and between 200 and 550 feet thick. It spans 10,000 square miles and 10 Texas counties in the Panhandle. Its crude is similar to that of Eagle Ford—light (38-42 gravity with excellent porosity of 6-12%).
The data is a bit lacking for now because the E&P companies pioneering the Cline are keeping a tight leash on this information—they’re hedging their bets and waiting for the right time. As many as 100 wells have been drilled so far.
Where to put your money …
Oklahoma City-based Devon Energy Corp. (NYSE:DVN) is the independent E&P company to add to your investment portfolio. In the Cline, Devon is partnering up with Sumitomo Corporation, which has a 30% stake in Devon’s Cline 650,000 acreage and has already invested $1.4 billion in the company’s Cline drilling operations.
In 2012, Devon drilled 40 wells in the Cline and has two rigs deployed there right now. This year should see an even more aggressive drilling campaign, with Devon targeting upwards of 140 wells in the Cline alone.
Devon is undervalued and selling cheap right now, but not because of mismanagement, rather because of low natural gas prices. We think it’s going to profit hugely on the Cline, so it’s a good time to buy.
In April, Devon raised more than a few investor eyebrows when it announced that in its 500,000 acres it had 3.6 billion barrels of oil—unrisked. In total Devon has 1.3 million acres. That’s where the 30+ billion barrels of oil estimate for the Cline comes from—it’s about 3.6 million boe per square mile. We will have to concede here that this amazing volume assumes that everything goes exactly as planned.
But there are two other things we like about Devon: 1) its proven a brilliant joint venture strategist, most recently as seen in its deal with Sumitomo that netted it $1.4 billion for a 30% working interest in Devon’s Cline play; 2) it can offset losses due to suppressed natural gas prices with easy liquids production rather painlessly.
Overall, Devon is sitting pretty in the Permian Basin, with 1.3 million net acres, 2,800 producing wells and Q1 net production of 68 MBOED, 78% of which was liquids. The Cline could very well be the next big thing for Devon.
Apache is also another Cline player we’re watching. While the company is undervalued like Devon and selling cheap, unlike Devon, it’s gobbling up assets and is now in the red to the tune of $18 billion.
With all this potential, why then did Chesapeake Energy Corp. (CHK) sell most of its holdings in the Cline last year? In September 2012, the company sold the bulk of its Permian Basin assets for a disappointing $3.3 billion. It appears they hedged their bets and didn’t like the potential variables here because it’s still early days. Maybe they thought Devon Energy’s 30 billion barrel estimate exaggerated—maybe they think the shale’s too deep for a fast payout. Or maybe there’s another reason. I wouldn’t take this as an indication necessarily of Chesapeake’s dismissal of the Cline potential. If you recall from one of our previous newsletters, Chesapeake went on a bit of an asset binge that it couldn’t afford and this, coupled with some management missteps, has forced it to purge, and the Cline, which is in its early days, was one way to generate some cash to actually develop some of the company’s other assets. Unlike Devon, Chesapeake hasn’t demonstrated brilliant strategy.