Reuters – David French
It promised to be the next great shale play, but an oil-and-gas-rich area of central and south Oklahoma has confounded many of the producers lured there, with one of its biggest champions warning that its business may struggle to survive.
In recent years, the SCOOP (South Central Oklahoma Oil Province) and the STACK (Sooner Trend, Anadarko, Canadian and Kingfisher) basins drew producers and private equity firms willing to wager billions of dollars on what many considered the next Permian basin, the largest and most prolific U.S. oilfield.
But while their many layers of oil mimicked the Permian, the region’s geology proved more inconsistent, undercutting results and making it a higher-cost U.S. shale area for producers.
Alta Mesa Resources Inc, which turned a $3.8 billion investment in the oilfield into under $30 million in just two years, last month said it may not be able to pay creditors.
Others are downsizing: Devon Energy Corp, for example, cut capital spending earmarked for its STACK position to 20% of the total in 2019 from 31% in 2018, according to Reuters calculations based on company presentations. The reallocation aims to improve cash flow from the STACK while focusing investment where returns are better, spokesman Tim Hartley said.
Cimarex Energy also forecasts a cut in spending, to 15% in the region in 2019, down from 30% last year, company presentations showed.
“Because we were living within cash flow, we just had a higher degree of confidence and decided to swing more of our capital into the Delaware Basin this year,” Thomas Jorden, chief executive of Cimarex, said in a first-quarter earnings call.
Producers also are narrowing development to areas where wells have produced better results: Marathon Oil Corp and Continental Resources both have anchored recent activity on two sub-areas – the STACK-Meramec and the SCOOP Woodford.
STRUGGLERS
Geology has stymied hopes for a “Permian Jr”: Exploration wells pointed toward uniform rocks that produced high levels of oil, but producers instead encountered more complexity underground, and production weighted toward gas – at a time of a global glut and stubbornly low prices for the commodity.
“The SCOOP/STACK is not a traditional shale play, so when you think about developing it, there are a number of different rock types,” said Denise Yee, vice president at consultancy RS Energy Group. “As it’s so complex, the hydrocarbon mix changes across the play, and the oil window is limited.”
Another disappointment has been poorer results from subsequent wells. Perhaps more than any other U.S. shale basin, the SCOOP/STACK has suffered from a condition known as the “parent/child” well problem, where secondary wells produce less oil than the original.
These problems are reflected in a higher median breakeven price needed to cover costs in the SCOOP and STACK, according to data from consultancy Rystad Energy. Since the start of 2018, that price has been $54.53 and $53.15 per barrel of oil, respectively, higher than the Permian, Bakken, Denver-Julesburg (DJ), and much of the Eagle Ford shale basins.
“The ‘Permian Jr’ nickname set some lofty expectations,” said Shak Ahmed, research analyst at RS Energy. “The play is resetting expectations around what it is capable of, and while this won’t be painless, it will be better in the long term.”
For smaller firms, and especially those backed by private equity, a lack of financial resources has limited well-design experimentation. Some are now looking to merge or sell operations.
EnCap Investments and Natural Gas Partners (NGP) are examining combining SCOOP/STACK assets, said sources familiar with the matter. Roan Resources, whose shares trade below $1.50, from more than $16 last year, in April said it was studying options after receiving inquiries about a potential sale or in-basin merger.
EnCap declined to comment. NGP did not respond to a request for comment.
February’s $5.5 billion purchase of Newfield Exploration, which had the lowest median breakeven in the STACK in 2017-18, as well as operations in North Dakota and Utah, by Encana Corp has offered hope that some deals are possible.
“The most important thing in the SCOOP/STACK isn’t scale, like it is in the Permian where the majors have huge rig counts, but having the best rock, and to be efficient in what you do,” said Timothy Perry, co-head of global oil and gas investment banking at Credit Suisse, which advised Encana on the deal.
Reporting by David French; editing by Gary McWilliams and Leslie Adler
