Get Ready for the Next Texas Oil Rush

by Aaron Levitt | July 10, 2013 11:19 am

Get Ready for the Next Texas Oil Rush

The Barnett Shale? That’s so last week. The Eagle Ford[1]? Been there, done that.

Not that there’s anything wrong with these two fields in Texas, of course. It’s just that much of their initial “boom” has already come to pass. Now they’re just about churning out steady and rising production.

For many E&P firms — and investors — finding the field in its “boom[2]” phase is key to getting amazing growth and portfolio returns. Luckily, a little-known field in West Texas could be the next hot ticket for energy producers — especially given its potential to dwarf the monster Eagle Ford – and the next stop in the Texas oil rush for investors.

It’s called the Cline Shale, and only a small handful of producers have begun buying up acreage in the region, which is situated in the heart of Texas’s Permian Basin. Also known as the lower Wolfcamp, the field is only about 140 miles long and 70 miles wide. However, packed within that small space could be a plethora of shale oil and natural gas[3], to the tune of 3.6 million barrels of recoverable oil per square mile.

Putting it another way, the Cline Shale’s 9,800 square miles could contain a whopping 30 billion barrels[4] of recoverable oil.

That would make the field 50% larger than both the prolific Eagle Ford and North Dakota’s Bakken[5] – combined. The latest estimates for the Bakken top out at 11 billion barrels, while the Eagle Ford top-end figures for recoverable oil are near 10 billion.

The projected drilling window of the Cline is also impressive. Early estimates show that the target zone for oil production is between 200 and 500 feet thick. This would be equivalent to having ten Eagle Ford Shales stacked on top of each other. Of course, that’s partly because the shale formation is actually stacked on top of another. In this case, it underlies the Wolfcamp proper in the west. That allows E&P firms to drill wells with dual completions in each formation. It’s like they’re getting a 2-for-1[6] sale when they drill.

Moreover, the Cline is liquids-rich. Early estimates show that the shale field is 85% oil and natural gas liquids (NGLs). The oil being pulled from the Cline is also deliciously sweet. So far, the 80 to 100 initial horizontal wells in the region have produced light sweet crude with an American Petroleum Institute (API) gravity of 38 to 42 degrees. This is similar to the Eagle Ford and the kind that refineries all of the country have been salivating to get their hands on — i.e. it’s super easy to “crack[7]” and lends itself to juicy margins.

Then there is the Cline’s lower operating costs to consider.

Operating in the Permian Basin is about 50% cheaper than drilling a well in the Bakken and the region’s long history of producing oil — it was first tapped in the 1930s — means that there is plenty of existing midstream infrastructure to tie into. That contrasts with the Bakken, where pipeline firms are basically working from scratch.[8]

Adding in the fact that the play is in oil-friendly Texas, and it’s easy to see why the Cline Shale “an excellent candidate” for hydraulic fracturing and is quickly becoming one of the greatest oil and gas booms America has ever seen.

Keeping in mind that the field is still in its early stages of drilling and initial production, investors may want give the Cline shale a go in their portfolios. Already, E&P producers have been racking up acreage in the region with firms like Apache (APA[9]), Callon Petroleum (CPE[10]), Chesapeake Energy (CHK[11]) and Gulfport Energy (GPOR[12]) now starting aggressive drilling campaigns in the play.

However, another beaten down oil player could be the best pick to play the Clines potential: beleaguered Devon Energy (DVN[13]).

The independent energy producer has had a long history of operating in the Permian Basin and was one of the first to realize the Cline’s potential to be a gusher. Partnering with Japanese Sumitomo Corp., Devon has unleased $1.4 billion into drilling activities[14] on its nearly 650,000 acres in the play.

Last year, Devon drilled 40 wells in the Cline and, based on the short amount of time spent prospecting, has reported some impressive figures for its wells. That’s prompted the firm to unveil an aggressive drilling program in the Cline, with 140 planned this year in the shale field.

Devon’s stock has stagnated over the last few years[15]. However, if the Cline is even half as good as early estimates, it could finally move the needle at the independent energy producer.

For investors, it represents the best way to get a foothold in next big thing in the shale world. 

As of this writing, Aaron Levitt did not own a position in any of the aforementioned securities.

Endnotes:
  1. Eagle Ford: http://www.investorplace.com/2012/05/energy-independence-fracking-the-eagle-ford/
  2. boom: http://investorplace.com/2013/03/fly-to-profits-with-this-eaglebine-play/
  3. natural gas: http://investorplace.com/2013/06/give-sandridge-a-chance-now-that-ward-is-out-of-work/
  4. could contain a whopping 30 billion barrels: http://www.rigzone.com/news/oil_gas/a/127338/Future_Looks_Bright_for_Cline_Shale_Potential/?all=HG2
  5. Bakken: http://investorplace.com/2013/05/6-ways-to-play-the-bigger-and-badder-bakken/
  6. 2-for-1: http://investorplace.com/2013/06/3-ways-to-play-coal-natural-gas-at-once/
  7. crack: http://investorplace.com/2013/05/3-ways-to-cash-in-on-the-chemical-industrys-building-binge/
  8. working from scratch.: http://investorplace.com/2013/07/buy-these-rail-players-on-a-dip-cni-unp-cp/
  9. APA: http://studio-5.financialcontent.com/investplace/quote?Symbol=APA
  10. CPE: http://studio-5.financialcontent.com/investplace/quote?Symbol=CPE
  11. CHK: http://studio-5.financialcontent.com/investplace/quote?Symbol=CHK
  12. GPOR: http://studio-5.financialcontent.com/investplace/quote?Symbol=GPOR
  13. DVN: http://studio-5.financialcontent.com/investplace/quote?Symbol=DVN
  14. unleased $1.4 billion into drilling activities: http://online.wsj.com/article/SB10000872396390443866404577562951331416574.html
  15. stagnated over the last few years: http://investorplace.com/2013/06/devons-mlp-plans-fall-on-deaf-ears/

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