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The Wolfcamp shale in the Permian basin has the potential to become the largest oil field in the U.S. In the Permian basin, the Spraberry is at a depth of 7,000 feet to 8,000 feet, whereas the Wolfcamp shale, located directly under the Spraberry is 8,000 feet to 10,000 feet deep. The Wolfcamp's greater depth allows more oil to be extracted, particularly with its lateral horizontal drilling potential of 7,000 feet. Wolfcamp, provides an opportunity for producers to drill horizontal wells through pad drilling. The estimated recovery for the Spraberry/Wolfcamp is 50 billion barrels of oil equivalent (BOE), which is only beaten by the Ghawar oil field in Saudi Arabia.

Wolfcamp is estimated to reach 100 billion boe of recoverable reserves in the future. Apache (APA) and Pioneer Natural Resources (PXD) are well positioned to benefit from this region because of their robust drilling activity in the Wolfcamp. Pioneer Natural is the largest acreage holder in the Spraberry/Wolfcamp area. Apache, on the other hand, is the top driller in the Permian and implements horizontal drilling in the Wolfcamp. It had 20 horizontal rigs in the region, which helped it achieve 18% year-over-year production growth in the third quarter of 2013. Apache has identified 971 drilling locations in the Wolfcamp shale and 2,321 drilling locations in the Cline shale (Wolfcamp D). This provides the company with a combined resource potential of 989 million boe.

Although, the estimated ultimate recovery (EUR) for a vertical well in the Spraberry/Wolfcamp shale is 140,000 barrels, it rises to as high as 450,000 barrels to 1 million barrels of oil for a typical horizontal well in the region. Based on Apache's target to drill 90 horizontal wells, the shale could translate into a resource potential of 40.5 million barrels of oil.

On the other hand, Pioneer Natural holds approximately 900,000 acres in the Spraberry/Wolfcamp shale. Additionally, it is the largest producer in the area with 13 horizontal rigs in operation. Pioneer Natural has a target of drilling 115 horizontal wells this year in the Southern Wolfcamp, where it has identified 5,600 drilling locations. The average EUR for a horizontal well in this region is 575,000 barrels of oil equivalent. Thus, for its wells drilled in 2014, Pioneer Natural could add over 66 million barrels of oil equivalent.

LNG will help drive down costs

Prometheus Energy Group is a leading supplier of liquefied natural gas (LNG) in North America. In December last year, Prometheus extended its deal with Apache for supplying LNG used to power multiple drilling rigs and the hydraulic fracturing process. Natural gas is used in the engines for pumping frac fluid into the wells. It provides a low-cost, cleaner burning alternative compared to diesel fuel used for drilling rigs and fracking wells. Use of natural gas in drilling and fracking reduces the pollution, as compared to diesel fuel. The use of LNG serves a two-fold purpose; it helps reduce the carbon footprint for Apache's operations and economizes the drilling processes.

Extension of this contract will also help Apache's initiative to use natural gas as much as possible and reduce its reliance on fossil fuels. The company plans to use natural gas wherever it can. This can include all operations that require a diesel engine, like drilling, fracking, or moving sand and water.

Additionally, Apache uses natural gas to power its fracking operations at its Granite Wash region. A fracking site in the Granite Wash typically uses 36,290 gallons of diesel for fracking. Switching to natural gas helps reduce approximately 70% of the diesel fuel costs. For the expected average diesel price of $3.77 per gallon in 2014, the total fuel bill for this year would be $136,813. However, with the use of natural gas, the total fuel cost could drop to $82,577, so Apache could save $54,236 per fracking site. Use of natural gas is at Granite Wash is particularly significant for Apache as it has 22,392 locations in the region, with a resource potential of 4,335 million boe. For Apache, this is the highest among all resource plays in the Central region. Thus, the use of natural gas as an alternative fuel to diesel will help Apache achieve reduction in well drilling and completion costs.

Conclusion

Apache is positioned to benefit over the long-term because of its drilling activity in the Wolfcamp. Horizontal drilling is helping the production growth in the region, and Apache's horizontal drilling focus will drive the company's growth. Apache is also driving down costs by using LNG as a drilling and fracking fluid. Additionally, using this fuel for drilling wells in the Granite Wash play will further reduce costs because of the high number of drilling locations in this region. I am bullish about the long-term prospects of this stock.

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.

Source: Apache: A Look At The Wolfcamp And LNG Potential