Get the SCOOP on the Next Big Shale Play

by Aaron Levitt | January 3, 2014 10:53 am

America’s ride towards energy independence has really been driven by one thing — shale. As producers continue to use hydraulic fracturing and dive head first into our various shale rock formations, they’ve been able to unlock a sheer abundance of natural gas and oil.

texas oil pump 630 150x150 Get the SCOOP on the Next Big Shale Play

As a result, fields like the Bakken and Marcellus have been become household names.

However, as the Bakken and company have become standard fields in the energy lexicon, much of their “booms” have already been realized from early investors. Sure, these super fields will continue producing plenty of energy for years to come. But the initial euphoria that comes with finding the next big thing has already passed by many investors.

Which is why investors looking to “wildcat” their way to gains should perhaps focus some attention to the Southern Central Oklahoma Oil Province, or SCOOP shale.

SCOOP is just beginning its journey on becoming a massive liquids rich shale play. That could mean some big bucks for early energy firms and their investors.

Getting the SCOOP

Like Texas, North Dakota and Pennsylvania, Oklahoma has a long history[1] of oil production and is steeped in energy tradition. The state has been a huge source of crude oil and natural gas for decades, and around 9% of all active oil wells currently lie within the Oklahoma’s borders. And like its fellow energy-rich states, hydraulic fracturing is helping rewrite that history forward.

Underlying most of Oklahoma, the Woodford shale is an interesting mix of natural gas, natural gas liquids and shale oil. However, given the Woodford’s vast size and complex nature, those various energy types aren’t spread evenly throughout the shale. There are places that are more “gassy” than others.

That’s a big problem considering the relatively low prices of natural gas.

However, the SCOOP portion[2] of the Woodford — covering about 3,300 square miles — is very liquids-rich. Featuring multiple pay zones and a variety of NGLs and shale oil, early estimations predict that the SCOOP could contain upwards of 70 billion barrels of oil. Putting that into perspective, the latest U.S. Geological Survey estimates only put the Bakken at 7.4 billion barrels of undiscovered and technically recoverable oil.

Aside from the larger resource potential, the SCOOP has the Bakken beat on another front as well — infrastructure.

Given Oklahoma’s history as an oil producer — dating all the way back to the early 1900s — the state is littered with midstream infrastructure. There are literally thousands of miles worth of pipelines and gathering systems that crisscross and dot its countryside, including the United States’ main oil storage depot in Cushing. With this extensive network of energy logistics[3] in the SCOOP’s backyard, producers have much easier time getting their oil to market than say, someone trying to tap a remote well in the Bakken.

All in all, that reduces costs and makes the SCOOP are desirable place to drill.

Still Time To Get In

With drilling activity in the SCOOP just starting to get underway, investors an early opportunity to get in before it really takes off. Several energy firms have already made the SCOOP a major part of their CAPEX and exploration plans.

One of the biggest winners could be Continental Resources (CLR[4]). Already, the Bakken’s superstar, CLR has made the SCOOP its No. 1 focus in the upcoming few years. The firm has been snapping up acreage in the region and now sits on an impressive land holding of 330,000 net acres. The company plans on applying the same cost cutting and surgical-like drilling techniques that its uses in the Bakken into its new SCOOP acreage.

Overall, CLR estimates[5] that its acreage in the SCOOP will produce around 1.8 billion barrels of crude. Perhaps more impressive, Continental estimates that those 2,240 future wells will generate returns on investment of between 40% and 55%. That’s some hefty profits for the top-notch energy producer if they come to fruition.

But CLR isn’t the only one drilling the SCOOP and smaller maybe better in the untapped shale play. Two ideal picks could be Eagle Rock Energy Partners (EROC[6]) and Cimarex Energy (XEC[7]).

EROC — which is structured as an upstream master limited partnership (MLP) — holds nearly 16,000 acres in the liquids-rich window of the SCOOP. Given the firm’s small size, that acreage position is actually quite large and could be major driver to the MLP’s future distributions[8] – currently at a 10% yield. So far, Eagle Rock saw an impressive 31% increase in its production as nine SCOOP shale wells went online during the past quarter.

Meanwhile, midcap[9] XEC owns roughly 120,000 net acres across the Woodford — nearly 75,000 are right on the “fairway” of the SCOOP shale. That’s basically the area of the Woodford that begins to transition from dry gas to shale oil. Overall, that means Cimarex is sitting on best possible acreage to benefit from all three categories of hydrocarbons.

For investors, the Southern Central Oklahoma Oil Province is now out of the bag. SCOOPing up shares of CLR, XEC and EROC are the best ways to play it.

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

Endnotes:
  1. long history: http://investorplace.com/2013/12/oil-sands-imo-su-cnq
  2. SCOOP portion: http://www.worldoil.com/January-2013-Woodford-Shale-SCOOP-helps-advance-Oklahomas-drive-for-oil.html
  3. energy logistics: http://investorplace.com/2013/12/rok-csco-bhi-digital-oilfield
  4. CLR: http://studio-5.financialcontent.com/investplace/quote?Symbol=CLR
  5. CLR estimates: http://www.reuters.com/article/2013/10/20/shale-usa-idUSL6N0I81SZ20131020
  6. EROC: http://studio-5.financialcontent.com/investplace/quote?Symbol=EROC
  7. XEC: http://studio-5.financialcontent.com/investplace/quote?Symbol=XEC
  8. future distributions: http://investorplace.com/2013/12/energy-stocks-bte-erf-nti-ec
  9. midcap: http://investorplace.com/2013/12/energy-stocks-upl-sm-crr-wpx-oas-midcap-stocks/

Source URL: http://investorplace.com/2014/01/scoop-shale-xec-clr-eroc/
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