Between SCOOP And STACK, What Drives Drillers To Oklahoma?

Ok, so Oklahoma.

A few months back we took a look at the SCOOP and the STACK plays in Oklahoma, and we determined that although activity had dropped off a bit (in relative accordance with the rest of U.S. onshore activity) there was still a lot of focused activity going on there. Because of the recent heavy news interest in Oklahoma Oil and Gas, I thought it would be a good time to take a look at Oklahoma operations.

Oklahoma In The News

The big news item in Oklahoma, of course, has to do with the price-fixing lawsuit against, and subsequent death of Aubrey McClendon. McClendon was the longtime head of Natural Gas behemoth Chesapeake, and more recently the collection of American Energy Partners. We will take a look at some key operations of those companies.

The second big news item is that Oklahoma regulators have ordered a 40 percent reduction in the number of injection wells in a significant O&G area in the central part of the state as a stop gap against the assumed link between those injection wells and the increased earthquakes in the region. We’ll take a look at how that ruling might affect operations on the ground.

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The third (and possibly most juicy) news item is Chesapeake Said to Weigh Sale of Assets in Oklahoma Stack Region. The terrible outlook for natural gas prices (which has Chesapeake selling $0 gas in some analysis) has forced them to look at their oil-soaked STACK acreage for cash. We’ll take a look at how Chesapeake is staked in the STACK, and how the STACK is faring.

And as a final item, E&P companies in Oklahoma are fighting against wind subsidies. This is interesting to me because of the link to out-of-state beneficiaries of the policy (and the perceived negative impact on natural gas demand). The timing on this issue seems to be appropriate due to the 7 percent reduction in state spending from a $1.3 billion dollar reduction on state energy tax collections. I won’t do any additional analysis on this item, but thought it was relevant to the overall discussion of Oklahoma.

Chesapeake And AEP Growth And Range

Figure 1 – Chesapeake Active Wells through December 2015, colored by trajectory, sized by 6 month cumulative gas (Source DI Production Workspace)

(Click to enlarge)

In Figure 1 we get a sense of the national network of natural gas success that Chesapeake has developed, largely during the McClendon years, although they continue to expand on those pathways. We see a background of vertical wells throughout the Mid-Continent, and extending over into the Arkoma Basin, as well as up east through West Virginia. But where Chesapeake has made its mark is the horizontal activity, and we see a clear focus on the biggest natural gas basins: in the south we see centers of activity in the Barnett, the Haynesville to its east, and the gas-rich southern part of the Eagle Ford; In the Appalachian Basin we see twin clusters of Pennsylvania Marcellus and Ohio Utica; and there are smaller bits of activity in New Mexico’s gassy slice of the Permian and the eastern part of Wyoming.

(Click to enlarge)

Figure 2 – American Energy Partners-Woodford wells in central Oklahoma, sized by first 6 month cumulative oil, and colored by production type (orange is oil, blue is gas) (Source DI Production Workspace)

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In this figure we see American Energy Partners-Woodford wells clustered between Cushing and Stillwater. Contrary to a lot of both Chesapeake and AEP’s focus these wells are primarily oil, and with the proximity to Cushing, they couldn’t really be closer to market.

Oklahoma Injection Wells

On March 7, The Oklahoma Corporation Commission handed down a Regional Earthquake Response Plan for much of Central Oklahoma with a planned reduction of more than 300,000 barrels a day from 2015 injection volume.

(Click to enlarge)

Figure 3 – Source Oklahoma Corporation Commission

Figure 3 shows us that although portions of the STACK and SCOOP are less effected by the proposed reduction, AEP’s previously discussed Payne County operations (around Cushing) along with a half dozen other counties to the northeast of Oklahoma City have been added alongside the previously restricted “Western Region” along the Kansas border.

The Stack

Keeping the Area of Interest from the OCC above in mind, let’s take a quick look at the portions of the STACK that Newfield has been focusing on:

(Click to enlarge)

Figure 4 – Source OK Energy Today

From this we can see that although the prime acreage of the STACK is within the OCC’s AOI, it mostly lies outside of the central reduction zone, and if there are Arbuckle Wells, they haven’t been shown on this map. One can speculate that the water cut from the often-targeted Meremec Formation is low enough that it’s of markedly less concern – in fact Felix Energy recently claimed that they had no produced water from STACK operations.

Figure 5 – Well Count for Canadian, Kingfisher and Blaine Counties by operator, Source (DI Analytics)

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In Figure 5 we see total well counts for the big 3 counties within the STACK. The three largest Operators are Devon, Cimarex and Linn. Frankly all of these operators would be greatly augmented by acquiring The Chesapeake holdings since they all have infrastructure and knowledge of the geology on their side.

• Devon isn’t faring too well on “The Street” (although some analysts have them in a more encouraging position for growth),

• Cimarex is generally regarded a hold, so might be in a decent position to lay out some cash if they see favorable market conditions,

• Linn may be approaching bankruptcy, so might have to sit this opportunity out,

• I think it’s worth noting that although a little smaller in terms of footprint, Newfield performed very well on the S&P 500 last year, so might have a good trajectory with their shareholders.

Conclusion

While current low natural gas prices will likely limit E&P opportunities to build upon Aubrey McClendon’s tremendous legacy, the prospect of an oil price rebound bodes well for many Oklahoma plays. The expansion of storage capacity in Cushing, as well as the new ability to export domestic U.S. crude to foreign markets from Cushing, means that Oklahoma’s central location, favorable geology, and business leadership guarantees that Oklahoma is ok.

By Eric Roach via Drillinginfo.com

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