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Summary

  • The Delaware Basin is Manna for all the companies with properties in the area.
  • Thanks to the proven multi-stacked oil pay, the exploitation of the Delaware Basin is still at its infancy.
  • Caza Oil & Gas is one of the juniors in the Delaware Basin that is sitting on a gold mine.

Introduction

The US is now home to many basins, from established gas basins like Arkoma to newer oil ones like the Williston Basin. However, some of these basins are under the radar a bit more than others. One of them is the Delaware Basin.

I have been tracking the drilling frenzy in the Delaware Basin very closely since early 2013, and this is how I unearthed Caza Oil & Gas (OTC:OTCPK:CAZFF). As some readers already know, I recommended Caza a few days ago and you can read my analysis here.

To me, Caza is a deep value investment opportunity at the current price of C$0.30 (15 GBX on the London Stock Exchange), because it is a high growth company with a good balance sheet and is sitting on a gold mine. Since the Delaware Basin has not attracted wide publicity thus far, I thought to post an overview with the recent drilling results from Caza's neighbors in order to help all realize the extent of this gold mine.

The Delaware Basin And The Stacked Pay Potential

First, let's build the setting. The Delaware Basin is west of the Midland Basin, as shown below:

(click to enlarge)

Source: Occidental Petroleum website

The Delaware Basin hosts several oil-weighted formations, and this is why I strongly believe that the Delaware Basin coupled with its stacked pay potential will dominate industry conversations over the next decade the way the Williston Basin did over the last.

The main oil-bearing formations in the Delaware Basin are the Brushy Canyon, the Avalon, the Bone Spring and the Wolfcamp. Also worth noting is that the Bone Spring play in New Mexico has one of the lowest break even costs among the unconventional wells in the US, as illustrated below:

Caza's acreage in the Delaware Basin is primarily located in Lea County (New Mexico), covering the Northern Delaware Basin and the Northern Shelf, as shown below:

(click to enlarge)

Source: Caza Oil & Gas Presentation

The Drilling Results In The Delaware Basin Are Off The Chain

What characterizes the Delaware Basin is the fact that all its zones have a consistently amazing performance which made me go "wow" when I saw it the first time. In fact, I have not found another basin in the US or Canada that hosts six producing zones with so strong and oil-weighted production. Here are the main players:

1) Concho Resources (NYSE:CXO) is one of biggest players in the Delaware Basin and has drilled all the six oil-bearing zones. This is why, Concho's results are very indicative about the productivity of the area.

Concho's properties in the Delaware Basin are shown below:

(click to enlarge)

Concho's latest results from the Northern Delaware Basin are illustrated below:

(click to enlarge)

A) In the northern Delaware Basin (primarily Lea and Eddy counties in New Mexico), 39 new wells had at least 30 days of production by the end of the first quarter of 2014 and set new average production-rate records with an average 30-day rate of 909 boepd (74% oil) and an average 24-hour peak rate of 1,488 boepd from an average lateral length of 4,535 feet.

B) In the southern Delaware Basin (Ward, Reeves, and Pecos counties in Texas), 7 new wells had at least 30 days of production by the end of the first quarter of 2014, with an average 30-day rate of 1,104 boepd (77% oil) and an average 24-hour peak rate of 1,453 boepd from an average lateral length of 4,385 feet.

Although Concho is primarily targeting the 2nd and 3rd Bone Spring, it is drilling all the six zones (Brushy Canyon, Avalon, 1st Bone Spring, 2nd Bone Spring, 3rd Bone Spring, Wolfcamp). Let's have a closer look at their performance:

A) At Lea and Eddy counties (New Mexico), Concho's results are outstanding from all the six zones, as shown below:

(click to enlarge)

and below:

(click to enlarge)

B) At the State Line area, Concho's results from all the six zones are also very strong, as shown below:

(click to enlarge)

According to the corporate presentation, Concho's results from the Northern Delaware Basin are below:

Northern Delaware Basin acreage:

(217,000 net acres)

Average IP-30

(boepd)

Average IP-24 h

(boepd)

Brushy Canyon

568

850

Avalon

690

1,251

1st Bone Spring

499

989

2nd Bone Spring

856

1,377

3rd Bone Spring

666

1,047

Wolfcamp

762

1,158

2) Devon Energy (NYSE:DVN) owns 1.3 million net acres in the Permian Basin and more than half of this acreage is located in the Delaware Basin, as shown below:

Source: Devon Energy website

The Permian Basin has been a legacy asset for Devon and continues to offer exploration and low-risk development opportunities. The company's Permian production averaged 91,000 boepd (77% oil/liquids) in Q1 2014, and the company's 2014 CapEx for the area is $1.4 billion.

And now I quote from Devon's latest quarterly report: "The most significant contributor to the company's Permian oil growth was once again the Bone Spring oil play in the Delaware Basin. Devon added 35 new Bone Spring wells to production in the first quarter, with initial 30-day rates averaging nearly 700 boepd, of which 80% was light oil.

Also in the Delaware Basin, Devon commenced production on two high-rate oil wells targeting the Delaware Sands in Lea County, New Mexico. Initial 30-day production from each of these two wells averaged in excess of 1,000 boepd, composed of nearly 90% light oil. The company has approximately 80,000 net acres prospective for the Delaware Sands within Southeast New Mexico".

Let's sum it up now at the table below:

Wells

IP-30

(boepd)

Bone Spring

700 boepd (80% light oil)

Delaware Sands (Lea County/NM)

1,000+ (90% light oil)

I will stress the fact that Devon's strongest production in the Delaware Basin (IP-30 higher than 1,000 boepd with 90% light oil) is coming from two wells located in an area neighboring Caza's core acreage in Lea County, New Mexico.

3) EOG Resources (NYSE:EOG) is another top-tier unconventional operator with significant acreage in the Delaware Basin, as shown below:

(click to enlarge)

Source: EOG Resources website

And now, I quote from EOG's latest quarterly report:

"In Lea County, New Mexico, EOG completed the Dillon 31 #1H, #2H and #3H with 1,225, 1,395 and 1,315 Bopd with 195, 215 and 190 Bpd of NGLs and 1.1, 1.2 and 1.1 MMcfd of natural gas, respectively. Further south in the Delaware Basin, EOG completed five Wolfcamp wells in Reeves County, Texas, in which it has 100 percent working interest.

The State Harrison Ranch 56 #1401H, #1402H, #1403H, #1404H and #1405H began sales at initial rates ranging from 325 to 700 Bopd with 195 to 490 Bpd of NGLs and 1.2 to 3.1 MMcfd of natural gas. Although the Delaware Basin Wolfcamp wells typically begin production at lower initial oil rates relative to the Leonard, they maintain steady, flat production, delivering excellent after-tax rates of return. EOG continues to test spacing between wells to determine optimal development".

Let's sum it up now at the table below:

Wells

IP-24h

(boepd)

Dillon 31 #1H

(Lea County/New Mexico)

1,603 (88% oil/liquids)

Dillon 31 #2H

(Lea County/New Mexico)

1,810 (89% oil/liquids)

Dillon 31 #3H

(Lea County/New Mexico)

1,688 (88% oil/liquids)

Harrison Ranch 56 #1401H

(Reeves County/Texas)

1,213 (71% oil/liquids)

Harrison Ranch 56 #1402H

(Reeves County/Texas)

1,213 (71% oil/liquids)

Harrison Ranch 56 #1403H

(Reeves County/Texas)

1,213 (71% oil/liquids)

Harrison Ranch 56 #1404H

(Reeves County/Texas)

1,213 (71% oil/liquids)

Harrison Ranch 56 #1405H

(Reeves County/Texas)

1,213 (71% oil/liquids)

4) Anadarko Petroleum (NYSE:APC) holds 245,000 net acres in the Delaware Basin, as illustrated below:

(click to enlarge)Source: Anadarko Petroleum website

Anadarko is accelerating its activity in the Wolfcamp shale oil play and continuing development activity in the Bone Spring play. The company's wells in the Delaware Basin have average IP-24h at 1,300 boepd (85%+ oil/liquids) and the EUR is 500 - 600 MBoe/well.

I also quote from Anadarko's latest quarterly report:

"During the first quarter, Anadarko's U.S. oil sales volumes were approximately 10,000 barrels per day above the midpoint of guidance, primarily driven by growth in the Wattenberg field, Eagleford Shale and Delaware Basin. The Delaware Basin, which includes the company's increased activity in the Wolfcamp Shale, provided a 6,000-barrels-per-day increase in liquids sales volumes".

Conclusion

I strongly believe that a lot of investors have a much better understanding now about the oil-rich hot spots trends of the Delaware Basin and Northwest Shelf in New Mexico, where the drilling activity has been picking up over the last months. I am also sure that I do not need to state the obvious about the productivity of that area, because the aforementioned results from Concho, Devon, EOG Resources and Anadarko speak volumes.

Meanwhile, Caza Oil has built a substantial position in the heart of the Northern Delaware Basin, which seems to be the most oil dense resource basin in the US, thanks to its proven multi-stacked oil pay. And according to the outstanding results from the Marathon Road and the Copperfield prospect, Caza is most likely sitting at the sweet spot of the play.

Last but not least, I suggest you to stay tuned because there is a second Part coming, where I will shed more light on the latest drilling results from the Delaware Basin.

Disclaimer: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

The opinions expressed here are solely my opinion and should not be construed in any way, shape, or form as a formal investment recommendation. Investors are reminded that before making any securities and/or derivatives transaction, you should perform your own due diligence. Investors should also consider consulting with their broker and/or a financial adviser before making any investment decisions.

Disclosure: I am long CAZFF. 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: Delaware Basin: These Energy Companies Have Benefited Enormously From Its Stacked Oil Pay (Part 1)