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Summary

  • Chesapeake Energy has applied for its first permit in the Buda in Dimmit County, Texas.
  • The latest home run Buda well is the Jessica drilled by CML Exploration, LLC. This well was spud on March 2 and produced 29,071 barrels of oil by May 31.
  • The best Buda oil wells have natural fractures and cost much less to drill and complete than Eagle Ford wells.

The Buda formation lies directly below the Eagle Ford formation in South Texas. Just like the Eagle Ford, the Buda contains prolific amounts of oil and liquids rich natural gas. In some places, primarily near fault lines, the Buda is naturally fractured and doesn't require expensive fracture stimulation completion techniques costing millions of dollars. This makes Buda wells much less expensive than Eagle Ford wells to drill and complete so long as one can find a sweet spot with natural fractures. Contango (NYSEMKT:MCF) has reported drilling and completion costs for some of its Buda wells at less than $2.5 million.

A very sweet Buda oil spot was discovered near the Zavala and Dimmit border by private oil company Dan Hughes. The best Buda well drilled by the Hughes company is the Heitz 302 3H well. That well began production in June of 2012 and according to the Texas Railroad Commission through May of 2014 it has produced 318,377 barrels of light sweet crude oil. So far this has been the best well drilled in the Buda sweet spot.

Contango has a large lease to the west of the Dan Hughes' lease and has been running a full-time rig drilling Buda wells over the last several months. The Buda is a statistical play highly dependent on the number of natural fractures encountered. Now, not only has Dan Hughes drilled a very successful Buda well on the eastern side of the Contango lease line, but CML Exploration, LLC, has drilled a successful Buda well on the north west side of Contango's Booth-Tortuga lease.

The latest home run Buda well is the Jessica well drilled by CML Exploration, LLC. This well was spud on March 2, and according to the Texas Railroad Commission produced 29,071 barrels of oil by May 31. The Jessica well is drilled parallel to the western side of the Beeler 7H well and is located halfway between the Beeler 16H well and the Beeler 4H well on the northern side of the Booth-Tortuga lease.

The success of the Jessica well is also very good news for U.S. Energy (NASDAQ:USEG), which has a 30% working interest in the Booth-Tortuga lease with Contango. U.S. Energy now has four different drilling partners in the Buda sweet spot, including Contango. The company also has more than 9,000 net acres prospective for the Buda. U.S. Energy is the most levered way for stock investors to participate in the Buda oil discovery based on the size of the company and its acreage position.

Now Chesapeake Energy (NYSE:CHK) has applied for its first permit in the Buda in Dimmit County, Texas. The Gibson Martinez well is a few miles due south of the Jessica well and the Buda wells drilled by Contango. Chesapeake still has more than 300,000 net acres in the Eagle Ford. The Buda oil discovery could move the needle for Chesapeake depending on how much of its acreage is located in sweet spots with natural fractures. Ironically, Chesapeake once owned most of the acreage surrounding the Dan Hughes and Contango leases in the existing Buda sweet spot. Due to financial difficulties the company sold its Northern Eagle Ford acreage position to EXCO Resources (NYSE:XCO) to raise cash and reduce the drilling budget. Now EXCO owns thousands of net acres and farm-in rights surrounding the Buda sweet spot. The success of the Jessica Buda well also is very good news for EXCO, which plans to test drill a Buda well of its own.

So far the only other publicly-traded company near the sweet spot on the Zavala and Dimmit border planning to drill a Buda well is Matador Resources (NYSE:MTDR). The rest of the companies drilling in the area are all private like CML Technologies and Dan Hughes. Because this is a discovery primarily made by private companies, with the exception of Contango and U.S. Energy, word has been slow to reach Wall Street. Now that Chesapeake is entering the game word could spread quickly on Wall Street, especially if Chesapeake finds a sweet spot of its own.

Disclosure: The author is long USEG, MCF, XCO. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Chesapeake Joining Buda Oil Rush In South Texas