Tapping the Mississippi Lime for Oil

Shale formations rich in natural gas, like the Marcellus and Utica, have transformed the U.S. energy landscape. By using horizontal and other unconventional drilling methods, energy producers have been able to revisit once-dry regions of the country and unearth its energy abundance. In a short time, these advances in drilling have allowed the country to go from being an importer of the fuel to potentially being a net exporter of natural gas. Tapping these abundant shale formations has certainly been effective.

Perhaps, hydraulic fracturing, or “fracking,” is too effective. The resulting glut of natural gas has sent prices downwards, and they now sit at historic lows. Various energy exploration and production (E&P) firms have been shutting down wells and shifting their focus instead toward natural gas liquids and shale oil.

In this reconfiguring of drilling activity, there are ways to profit. One rock formation, which isn’t made of shale, could be the biggest source of domestic oil since the rediscovered Bakken shale of North Dakota. And for investors, getting in now could be the key to long-term profits.

The Shallow Seas of Oklahoma

Looking at northern Oklahoma and southern Kansas today, it’s hard to believe that at one time the region was covered by a vast shallow sea. Over the eons, those rich seas left a plethora of decaying organic matter and created one of the largest limestone formations in country: The Mississippi Lime.

Early in our nation’s energy story, the Mississippi Lime was a hotbed of oil-drilling activity. More than 100 years ago, what is now ConocoPhillips (NYSE:COP) made a name for itself drilling on a formation called the Burbank field, and for a solid 50 years, it saw commercial production from thousands of vertical wells. The formation had all the hallmarks of a great field: porosity, permeability and lots of hydrocarbon deposits.

However, there was only so much traditional vertical drilling techniques could do, and these wells ran dry. The region saw activity slow to a crawl, and acreage could be had for dirt cheap.

Fast forward to today, and the Mississippi Lime is once again heating up. The same advanced horizontal and hydraulic drilling styles that are revolutionizing America’s shale formations are now being applied to limestone rock. The 350 million-year-old carbonate formation is pretty well suited for fracking. The technique allows firms to dig past the “chat” layer of rock (where vertical drilling stops) and into the tight lime below.

Fracking works well in limestone due its hard porous nature that permits the rock to be cracked under pressure. The style of rock also contains natural fissures and fractures that hold pockets of oil. Horizontal drilling increases the odds of hitting such a pocket. By using the new drilling advances, E&P firms have been able to unlock a virtual ocean of oil, similar to what’s happening in North Dakota’s Bakken field.

As natural gas prices continue to plummet amid the overabundance, the Mississippi Lime is seeing increasing drilling activity. The play is rich in oil and natural gas liquids (NGL) like butane. Overall, analysts estimate the region has a 55/45 mix of oil to natural gas. This makes it a preferred spot for producers.

Prices for NGLs generally track the West Texas Intermediate crude standard and generally sell for about 50% of the price of a barrel of oil. Given WTI’s recent rise and natural gas’s dwindling prices, the focus on tight gas and oil will benefit firms in the lime.

However, the oil-to-gas ratio isn’t the only reason to be bullish about the Mississippi Lime. The type of rock encompassing the field makes it a cheaper emerging play than some other shale formations. The lime is porous enough that producers can use lower-pressure and lower-cost fracking equipment, which wouldn’t be strong enough to work in the shale plays.

That could be a huge cost savings as Halliburton (NYSE:HAL) has continually warned about its order backlog for the high-powered pumps. In addition, the oil-producing strata in the Mississippi Lime isn’t very deep: just 4,000 to 6,000 feet. Wells in the Bakken are nearly twice as deep.

Finally, the region’s oil-producing history provides an already-in-place network of midstream infrastructure. The field is just a stone’s throw away from the Cushing, Okla., storage depot, and gathering systems already dot the lime. This mature infrastructure network will help keep costs low for producers.

Opportunities for Investors

Given the growth prospects and reinvention of the Mississippi Lime through horizontal drilling, investors should take notice. The region’s rebirth is still young, and you can find plenty of opportunities to profit. Leading the way is top producer, SandRidge Energy (NYSE:SD). The company has been quite aggressive in gathering assets in the region and currently owns more than 1.5 million acres. SandRidge has identified more than 7,000 potential horizontal drilling locations and plans on tapping approximately 380 of them during 2012.

The E&P firm recently beat fourth-quarter earnings estimates by 4 cents and unveiled an expansive three-year plan. SandRidge hopes to triple its earnings to $2 billion by 2014 and to double its oil production. The firm’s handle on the Mississippi Lime will certainly help with that. SandRidge estimates that its average Mississippian well will cost $3.2 million but yield more than 456,000 of barrels of oil equivalent. Considering that crude prices have been hovering above $100, that makes each well quite profitable.

SandRidge does have its naysayers. Analysts point to the company’s 42.8 billion in debt as well as its “contrarian” CEO Tom Ward. The company recently made a large purchase of offshore assets in the Gulf of Mexico, even though SandRidge has traditionally been a very onshore firm. However, Ward was one of the co-founders of natural gas giant Chesapeake (NYSE:CHK), and the company has been making the right moves to shore up its balance sheet through royalty trust spin-offs.

Overall, SandRidge could provide investors a high-growth play in a very high-growth area. Share’s of the firm represent one of the best ways to access the rebirth of the Mississippi Lime.

–As of this writing, Aaron Levitt doesn’t own shares of any company mentioned here.

Article printed from InvestorPlace Media, https://investorplace.com/2012/03/tapping-the-mississippi-lime-for-oil/.

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