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Summary

  • The Delaware Basin is a boon to all the companies with properties in the area.
  • The Delaware Basin hosts more than one top-producing unconventional oil plays in North America.
  • Thanks to the proven multi-stacked oil pay, the exploitation of the Delaware Basin is still at its infancy.

Introduction

The Permian Basin is made up of several smaller basins including the Delaware Basin and the Midland Basin. After spending several years studying the gas and oil-prone shales in North America, I have been pleasantly surprised by the drilling results in the Delaware Basin. Many E&P companies keep generating significant returns from their oil-weighted wells in that area, and the drilling frenzy does not seem to abate any time soon.

Nevertheless, this drilling frenzy and the eye-catching results in the Delaware basin have gone largely unnoticed thus far, although they are superior to the ones coming from the Bakken and Eagle Ford formations. This lack of coverage prompted me to write this series in order to uncover the emerging Delaware Basin and emphasize on its multi-stacked oil pay.

In Part 1 here, I presented the latest drilling results from Concho Resources (NYSE:CXO), EOG Resources (NYSE:EOG), Devon Energy (NYSE:DVN) and Anadarko Petroleum (NYSE:APC). To get a complete understanding about the Delaware Basin and its potential, I highly recommend you to read Part 1 first before reading Part 2.

The Drilling Results In The Delaware Basin Are Outstanding

The Delaware Basin is important not only for the eye-catching drilling results but also for one more reason. In most Basins to date, operators target just one or two primary hydrocarbon producing formations. For example, the hydrocarbon producing zones in the Williston Basin focus on the Bakken shale and the Three Forks. In Texas, the companies target the Upper and Lower Eagle Ford shale. In contrast, the Delaware Basin features a stacked stratigraphic column with as many as 6 to 10 targets susceptible to technological exploitation. This is why, a "shale fever" is currently spreading through the Delaware Basin, and my belief is that it will take several decades before this fever fades away.

As a result of the increasing production, New Mexico shelf takeaway capacity is improving with further relief coming in H2 2014. For instance, Crestwood Midstream Partners (NYSE:CMLP) announced in April 2014 a further expansion of its "Willow Lake Project," located in the Delaware Basin, which includes the conversion of a portion of its Las Animas natural gas gathering system into rich gas service and the construction of an initial cryogenic natural gas processing plant.

Concho Resources also announced recently its first crude oil midstream JV in Northern Delaware Basin. The initial system consists of approximately 400 miles of crude oil gathering pipe lines and storage in the northern Delaware Basin, with multiple crude oil delivery points. The initial capacity is 100,000 Bbls/d and can be expandable to 120,000 Bbls/d.

In this Part of this series, I will present the latest drilling results from Cimarex Energy (NYSE:XEC), Energen Corporation (NYSE:EGN), Matador Resources (NYSE:MTDR) and Apache Corporation (NYSE:APA).

As always, the famous major and intermediate E&P companies lead the way in any Basin, because they can afford extensive development programs. But when it comes to bargain hunting, the junior producers are often the ones that are hardest to find. Among the juniors of the Delaware Basin, I prefer Caza Oil & Gas (OTC:CAZFF). Based on the latest results, Caza Oil's properties partly cover the sweet spot of the Basin (Lea and Eddy Counties), but the stock trades with heavily discounted multiples compared to its peers, as shown in my analysis here.

Let's dig deeper now into the aforementioned companies that have an overwhelming success by accessing the oil-rich zones of the Delaware Basin:

1) Cimarex Energy has a strong land position in the Delaware basin, as shown below:

Source: Cimarex Website

and below:

Source: Cimarex Website

Cimarex Energy's operations are focused on the multi-stacked oil pay of the Delaware basin, having identified multiple horizontal drilling opportunities in the Wolfcamp, Avalon and Cisco/Canyon shale intervals and the Bone Spring sands. The prolific oil-producing 2nd and 3rd Bone Spring sands account for most of the company's current Permian Basin activity and production, while the delineation of the Wolfcamp shale is underway.

According to the company's presentation, the results from the oil-bearing zones of its wells drilling in the Delaware Basin in Q1 2014 are below:

Wells

Average IP-30 (boepd)

2nd and 3rd Bone Spring

(Eddy & Lea County/NM)

966 (74% light oil)

3rd Bone Spring

(Ward County/TX)

975 (83% light oil)

2nd Bone Spring

(Culberson County/TX)

960 (57% light oil)

Avalon shale

(Lea County/NM)

1,003 (77% light oil)

and here are the company's results from its Wolfcamp wells drilled to date:

Wells

Average IP-30 (boepd)

Wolfcamp D

(Culberson County/TX)

2,080 (60% light oil and liquids)

Wolfcamp A

(Culberson County/TX)

1,192 (54% light oil)

Wolfcamp A

(Reeves County/TX)

1,091 (54% light oil)

Wolfcamp A - lateral

(Reeves County/TX)

1,816 (56% light oil)

Wolfcamp B/C

(Reeves County/TX)

1,190 (41% light oil)

Wolfcamp A

(Ward County/TX)

889 (74% light oil)

According to the company's annual report, here are the drilling results from the Delaware Basin during 2013:

Wells

Average IP-30 (boepd)

New Mexico Bone Spring

655 boepd (87% light oil)

Texas 3rd Bone Spring

(Ward and Winkler Counties)

1,000 boepd (80% light oil)

Texas 2nd Bone Spring

(Culberson County)

990 boepd (56% light oil)

Avalon shale

1,080 boepd (70% light oil)

Wolfcamp shale

(Worsham 6-22 3HR)

(Reeves/Ward Counties)

889 boepd (74% light oil)

Wolfcamp shale

(Montrose LL 45 Unit #1)

(Culberson County)

2,803 boepd (27% light oil)

2) Energen Corporation is another active driller in this prolific oily Basin and its properties are shown below:

(click to enlarge)

Source: Energen Website

For 2014, Energen will spend $380 million in the Delaware Basin, targeting the 3rd Bone Spring and the Wolfcamp zones. The company's Bone Spring and Wolfcamp wells have generated a very strong performance thus far, as shown below:

Wells

IP-30

(boepd)

3rd Bone Spring (10 wells)

~800

(~80% oil/liquids)

University28‐21 #1H

653

(89% oil/liquids)

Benton 3‐12 #1H

1,036

(76% oil/liquids)

University25‐17 #1H

769

(85% oil/liquids)

Bodacious C7‐19 #1H

1,671

(82% oil/liquids)

E.J.Brady 56‐1 #1H

1511

(56% oil/liquids)

Tisdale 56‐8 #1H

1,804

(64% oil/liquids)

Red Rock6‐6 #1H

1,137

(85% oil/liquids)

Matador 6‐33 #1H

1,057

(86% oil/liquids)

Langley 2‐36 #1H

1,813

(73% oil/liquids)

University39‐17 #1H

950

(78% oil/liquids)

Winchester 57‐10 #1H

2,186

(67% oil/liquids)

3) Matador Resources is another company with significant acreage in the Delaware Basin, as shown below:

Source: Matador Website

According to the CEO, Matador's production growth in the Delaware Basin will continue throughout the year, given the fact that the company's wells have generated excellent rates thus far, as quoted below:

"We are especially pleased by the performance of our initial horizontal wells in the Delaware Basin. Each of these wells has exceeded the company's expectations, and Matador is especially pleased by the shallow declines exhibited by both the Ranger 33 State Com #1H and the Dorothy White #1H wells thus far, which it attributes to the effectiveness of the stimulation treatments performed on these wells."

Let's summarize Matador's latest results from the Delaware Basin at the table below:

Wells

IP (boepd)

Ranger 33 State Com #1H

(2nd Bone Spring)

(Lea County/NM)

IP-180 (6 months)

484 (91% light oil)

Dorothy White #1H well (Wolfcamp)

(Loving County/TX)

IP-120 (4 months)

834 (66% light oil)

Rustler Breaks 12-24-27 #1H well (Wolfcamp)

(Eddy County/NM)

IP-30 (1 month)

1,160 (50% light oil)

And thanks to these excellent results, Matador expands its position in the Delaware Basin, according to the company's CEO:

"We continue to increase our leasehold position in the Permian Basin and are pleased to report that we hold approximately 56,200 net acres in the Permian Basin, primarily in Loving County, Texas and Lea and Eddy Counties, New Mexico, that we believe to be prospective for the Wolfcamp and Bone Spring plays, as well as other targets. We will continue our leasing efforts as opportunities arise."

4) Apache Corporation is one of the largest operators in the Permian Basin and controls over 3.3 million gross acres with exposure to numerous plays, as shown below:

Source: Apache Website

As part of its exposure to the Permian Basin, Apache owns 215,000 net acres in the Delaware Basin, targeting three landing zones (the 2nd Bone Spring, 3rd Bone Spring and Wolfcamp formations) with three rigs during the remainder of 2014.

The company also owns 850,000 net acres in the Central Basin Platform that covers a significant part of Lea and Eddy counties in New Mexico, along with 95,000 net acres in the Northwest shelf where it targets the Yeso play (Eddy county/NM).

Although Apache has not provided any specific details about its drilling results in the Delaware Basin, its oil-weighted production and its consistent production growth YOY underscore the increasing productivity of the area.

Apache's production in Q1 2014 in the Permian Basin averaged a record 149,564 boepd (76% oil/liquids), up 12% over the previous quarter and up 25% from the prior-year period. This substantial growth during the quarter was primarily driven by successful horizontal drilling programs across the basin and led by the Wolfcamp shale.

Conclusion

The Delaware Basin is an emerging oil and natural gas liquids-rich region with approximately 200,000 boepd currently being produced. Production is supported by approximately 50% from the Bone Spring and 40% from the Wolfcamp formation. Lea and Eddy Counties, New Mexico, have been the leading counties in the region from a production and drilling activity standpoint since the play began in 2011.

Meanwhile, the companies continue to experiment with different drilling tools, liners, fluids and fracture techniques to find the optimal combination and improve the shale economics even more.

Nevertheless, the Delaware Basin has not made headlines yet. However, I strongly believe that it will catch the eyes of investors sooner rather than later, given the fact that the multi-stacked oil pay will make the full-field development continue over the next decades.

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.

Source: Delaware Basin: These Energy Companies Have Benefited Enormously From Its Stacked Oil Pay (Part 2)