Cline Shale: Another Home Run For U.S. Shale Oil?

Includes: APA, EOG, LPI, PXD, SM
by: Richard Zeits

Presenting to investors its macro view on the strategic direction of the U.S. domestic oil supply, EOG Resources (NYSE:EOG) often makes the argument that the Eagle Ford Shale and the Bakken will remain unrivaled in the foreseeable future in terms of their contribution to the overall unconventional crude volumes produced. Indeed, statistical data presented by EOG suggests that the two plays currently account for almost 80% of national horizontal oil production (slide below). The Permian, despite the tremendous amount of cheer within the industry and investment community, remains a distant third as a source of horizontal crude production.

(Source: EOG Resources' November 2013 Investor Presentation)

The primary factor that explains the relatively slow ramp-up of production in the Permian, as per EOG, is that shale plays in this Basin are predominantly "combo" plays, with substantially lower percentage of crude oil in the production stream than in the Bakken or in the oil window of the Eagle Ford. In addition, the argument goes, the Permian lags, at least so far, in terms of average well productivity. (Slide below.)

(Source: EOG Resources' November 2013 Investor Presentation)

EOG's argument reflects historical statistics. Moreover, given the very strong operating momentum in both the Bakken and Eagle Ford, the two shale plays will inevitably maintain a very significant share in U.S. unconventional oil production for at least several more years. However, the implication from EOG's presentation may understate the potential of the Permian Basin to deliver a strong production ramp up, validating optimistic expectations, and reduce the gap in produced volumes relative to the Bakken and Eagle Ford in a relatively short period of time.

The most recent results in the Wolfcamp and Cline plays - that are still in their infancy when compared to the Bakken or even the Eagle Ford - indicate that the Permian may be able to match the other two basins in terms of well productivity. Particularly impressive are the results from the Cline Shale play (the cross-section below) which is deeper and less delineated than the Wolfcamp and has been viewed with some skepticism.

(Source: Laredo Petroleum's November 2013 Investor Presentation)

Pioneer Natural Resources Posts Stellar Cline Shale Results On the Western Side of the Basin

In a noteworthy press release issued yesterday, Pioneer Natural Resources (NYSE:PXD) announced a Cline Shale well result that sets a new IP record for the play.

Pioneer's University 7-43 10H well is located in Andrews County in the northern Midland Basin. The well had a 24-hour peak initial production rate of 3,605 Boe/d, of which 74% was oil. This represents the highest 24-hour IP peak rate for any horizontal well in the Midland Basin to date and beats the previous record, also set by a well drilled by Pioneer, the O'Daniel, which was placed on production two weeks ago and IP-ed with 3,156 Boe/d. The University well was completed with 31 frac stages over perforated lateral length of 7,382 feet.

The newly reported Cline test extends the list of Pioneer's successful wells in the play on the western side of the Midland Basin all of which have been exceptionally strong. The slide below shows production history for the company's four Cline wells.

The first well, the DL Hutt C #4H, in Midland County, has over 60 days of production history and has tracked close to the company's 800,000-Boe type curve (the well has a slightly shorter lateral than the other three wells). Its 24-hour peak IP rate was 2,128 Boe/d and 30-day peak IP rate was 856 Boe/d, 69% oil.

The second well, the Scharbauer Ranch #201H in Martin County, had an IP rate of 1,509 Boe/d, 60% oil and 30-day average rate of 652 Boe/d. The Scharbauer is the weakest well of the four but has still tracked above the 500-Boe type curve.

(Source: Pioneer Natural Resources' November 13 Investor Presentation)

Until recently, the majority of the industry activity in the Cline Shale play has been concentrated in Glasscock County on the eastern side of the basin, led by Apache Corporation (NYSE:APA) and Laredo Petroleum (NYSE:LPI) with very impressive results. Pioneer's tests are particularly important as they prove that the Cline Shale can be equally prolific on the Western side, extending the play 50-60 miles to the west and northwest across the basin (the slide below shows some of the best wells drilled by Pioneer, Apache and Laredo; these wells effectively delineate a vast area in between for the Cline Shale play). Pioneer believes that the Cline in Midland County could be as productive as it is in Glasscock County, while Martin County may exhibit somewhat lower EURs, around or above the company's 500-MBoe type curve. Also impressive is the consistently high oil content in the Cline, which is deeper and thermally more mature than the Wolfcamp above (Cline wells start off with a bit higher gas-oil ratios, which are in the 1,500-2,000 range versus the Wolfcamp at around 1,000 gas-oil ratio).

(Source: Pioneer Natural Resources' November 13 Investor Presentation)

Pioneer has provided estimated drilling returns for its northern horizontal Wolfcamp and Cline program. Based on the slide below, pretax IRRs range from ~60% for 650 MBoe type curve to ~150% for a 1,000 MBoe type curve, using flat $95 oil, flat $4 gas and target cost estimate of $8 million per well. According to the company, wells with 800 to 1,000 MBoe estimated EUR should have payouts of less than 1 year. The returns shown on the slide appear to blend together Wolfcamp wells (that tend to be a bit oilier) and Cline wells. However, even assuming that Cline Shale returns are a bit lower than the average on the slide, the returns estimated by Pioneer look materially higher than what is shown in presentation by some of its peers.

(Source: Pioneer Natural Resources' November 13 Investor Presentation)

Clearly, the four wells reported by Pioneer do not make a sample and need to accumulate sufficient production histories so that meaningful EUR estimates can be established. Still, the results are nothing short of spectacular and compare favorably to the best results by Laredo and Apache.

Laredo And Apache Advance The Cline Play in the East

On the eastern side of the basin, Laredo and Apache have drilled to date a total of approximately 60 Cline Shale wells. The results have been improving consistently.

Laredo's drilling activity in the Cline has been concentrated in Glasscock County, although several wells were also drilled in Reagan County, about 30 miles to the south.

(Source: Laredo Petroleum's November 2013 Investor Presentation)

Laredo's most recent long-lateral wells were particularly strong, as shown on the slide below. The company is using an average three-stream EUR for its long-lateral wells in the Cline of ~800 Mboe.

(Source: Laredo Petroleum's November 2013 Investor Presentation)

Laredo's estimated drilling returns in the Cline are substantially lower than the estimates presented by Pioneer for their Wolfcamp/Cline program, although still solidly economic. Laredo estimates RORs of slightly above 30% for its Cline wells at flat $90 WTI, flat $3.75/Mcf gas and $8 million well cost. (The significant difference between Pioneer's and Laredo's figures does raise some questions.)

(Source: Laredo Petroleum's November 2013 Investor Presentation)

Apache, a major acreage holder in the Midland Basin alongside Pioneer (Apache estimates that it has half a million acres prospective for the Cline), has completed over 24 Cline Shale wells to date, mostly in its Deadwood area in Glasscock County. Apache's acreage offsets Laredo's acreage on the west. It is important to note that Apache has been using short laterals and low frac stage densities in its wells, therefore the company's EURs are not directly comparable to Laredo's or Pioneer's. In that context, Apache's best well results (slide below) are in fact at par with the best peer wells.

(Source: Apache Corporations' November 2013 Investor Presentation)


The Cline Shale is a small subset of development opportunities offered by the Permian. (In fact, one of the reasons the Cline play has gained strong momentum, Cline wells provide the advantage of holding by production the entire mineral stack above it as well as helps to map out with a great degree of precision all target intervals above it).

Early results in the Cline are truly impressive (so are results in the more actively drilled Wolfcamp interval). There is very little doubt already at this point that both the Wolfcamp and the Cline will become large-scale, highly economic plays and significant contributors to the U.S. unconventional oil production.

Pioneer's wells establish that the Cline is most likely highly prolific all the way across the basin and effectively de-risk an enormous area with dimensions of approximately 80 miles by 40 miles. Recent SM Energy's (NYSE:SM) Dorcus well results and discussion show that the play likely works even further west, almost all the way to the edge of the Midland Platform.

Pioneer and Apache are among the greatest beneficiaries of the delineation due to the two companies' massive acreage holdings in the basin. No surprise, Pioneer's stock moved 7% higher upon the issuance of its recent well results yesterday.

If one could extrapolate play evolutions in the Bakken and Eagle Ford, it would be only logical to expect that the Permian will follow on the same trajectory as the other two basins, just with a steeper learning curve, and will ramp up much quicker than skeptics may currently believe. Provided of course that oil price remains at its current $90-$100 per barrel level (something that can never be taken for granted).

Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.