Stacked pay calms investor concerns

WITH THE OIL AND GAS industry still struggling with low prices, 2016 will be a year of continued contraction for US onshore exploration, said Robert Clarke, Research Director, Lower 48 Upstream for Wood Mackenzie. Offering a bit of hope, Clarke, speaking at the NAPE Business Conference in Houston February 10, said the year will also be one of preparation.

Looking ahead on the US onshore exploration front in 2016, Clarke offered a few takeaways. First and foremost, expect no budget space for true exploration. That said, projects aren't off the table altogether. Instead, he explained, the focus will be on "better work" in existing plays. Future drilling scenarios could be used to analyze remaining inventory in current plays. Then came these words: Stacked Pay Calms Investor Concerns. Clarke's entire presentation was insightful and lively, but that's where my ears really perked up.

Stacked pay offers operators a way to explore in 2016, he said. It's appealing for a number of reasons: geology, completion design, costs, and margin preservation are all interlinked. Differentials are critical when margins are slim, so mature basins with developed infrastructure are preferred, Clarke said, noting a focus on stacked pay may be a theme for the next couple of years.

For last month's column, I spoke with an analyst about the still-desirable nature of the Permian and its Delaware and Midland Basins in the $30/bbl price environment. One driver of its lasting appeal is its multiple/stacked pay nature. But wait! Stacked pay potential isn't just a Midland Basin story, Clarke reminded. Offering optionality, Appalachia, the Gulf Coast, ArkLaTex and the DJ, Powder River, and Anadarko Basins are all candidates, he said.

For brevity, let's pull one play from the list, the Anadarko Basin, where "the pioneering" of the Woodford shale plays in Oklahoma "helped turn around that state's oil and natural gas production over the past decade," IPAA wrote in March 2015.

"The Cana Woodford play and extensions such as the SCOOP, also known as the South Cana Woodford, and the STACK, have highlighted the shift in interest away from pure natural gas plays, especially in Oklahoma, toward those with more liquids potential. A key feature of these Anadarko Basin plays is their multiple, stacked geologic horizons compared with some other major plays across the US, highlighting the added importance of managing efficiency and costs," IPAA continued in a summary of the play in 2015.

Here, a few recent happenings from players in the space. Of course there are others, but I only have one page.

In its year-end 2015 update and 2016 outlook dated February 24, Newfield Exploration Co., a pioneer in the STACK, noted plans to spend approximately 80% of its $625-$675 million total capex budget (including wells operated by others and excluding capitalized interest and internal costs) on the Anadarko Basin in 2016-50% STACK, 30% SCOOP with an expected rig count of 3-4 and 1-2, respectively. The company reported year-over-year growth in the Anadarko Basin of approximately 50% in both production and proved reserves in 2015-the play now accounts for 53% of total company proved reserves-and increased its footprint to 315,000+ net acres with an additional 20,000 net acres in play fairways.

Continental Resources has a large position in the SCOOP targeting the Woodford and Springer Shale and an emerging position in the STACK, which remains "a driver of additional value" for the Oklahoma City-based company, said Wunderlich Securities analyst Jason Wangler in a note dated February 11. While initial STACK wells were completed in 2015, limited production data is available, but Wunderlich analysts expect things to change in 2016 in terms of reserves and production, "as the company focuses more attention and capital to the play." Of the 19 average rigs expected to run for the company in 2016, four are anticipated the North Dakota Bakken core, five to six in the SCOOP, five in NW Cana, and four to five in the STACK. The company received a Buy rating and a $25 price target because the analysts believe "many investors are not yet seeing the potential of CLR within the STACK play."

Gastar Exploration is eyeing the potential. The company continues to transition to a STACK pure play with its recently announced $80 million sale of Appalachian Basin assets (expected to close by March 31). And while the deal would help the balance sheet, liquidity is still a concern, thus making the company "a very interesting story from an asset perspective, but with concerns about the ability to develop and exploit its lucrative assets," Wangler offered in a February 23 note. That being said, Wunderlich analysts "believe GST will be able to find the capital needed to develop its STACK play and remain Buy rated with a $2 target."

If the Appalachian asset sale closes, Gastar would become the only publicly traded pure play STACK company, and "given the market's interest and deal flow in the region," said Wangler, "we think this should help the company become more prominent." The analysts await the drilling of the company's second Meramec well, but anticipate positive results given the results of its first well. Going forward, Gastar "could continue to monetize assets, this time via a joint venture or partial asset sale in the STACK play, and raise ample funds that could be used to continue developing the play as well as paying down debt," Wangler concluded.

With margin preservation the priority, stacked pay may indeed be the theme of US exploration for the next couple of years. And, I suspect, the industry will make it work.