Venoco: Speculating on the Emerging Monterey Shale Opportunity

| About: Venoco, Inc. (VQ)
Investor interest in U.S.-based shale oil plays has been growing in recent years as excellent exploration and production results have occurred in the Bakken shale play in North Dakota. This recent Investor’s Business Daily article highlights just how much oil these plays hold and how lucrative these shale plays can be for investors. An excerpt from the article is instructive:

“In April 2008, the U.S. Geologic Survey raised its estimates of recoverable oil reserves in the Bakken Formation of North Dakota and Montana. The figures, as high as 4.3 billion barrels of oil, represented about a 2,400% increase over earlier estimates.

Less than three years later, production in the Bakken is booming and the estimates of recoverable reserves are soaring anew as new technology opens up shale plays in the region and across the country.

Jeff Hume is president and chief operating officer of Continental Resources (CLR), the top producer in the Bakken. He contends that the Bakken holds as much as 24 billion barrels of oil that can be recovered with current technology. That's at the high end of current estimates. If true, it would be about a 500% increase over USGS's 2008 estimate.”

As production rates and share prices have risen for Bakken based producers, investors have been on the lookout for the next emerging shale play. This has led to increased interest in emerging shale plays such as the Marcellus shale play in the Appalachia region and the Eagleford shale in Texas. There are some excellent opportunities in these plays but one limiting factor I see is that there are too many operators crowding into these plays paying large premiums for land. With the exception of some early movers like EOG Resources (NYSE:EOG) many of these operators do not have the large acreage positions in the prime oily locations to really get my attention.
One emerging shale play that is in its infancy is the Monterey shale in southern California. The Monterey shale is actually the largest of the onshore shale plays in the U.S. and has not garnered much attention up to this point due to the lack of exploration, which is due to a perception that the Monterey did not have the same potential as the other shale plays.
Venoco Inc. (NYSE:VQ) is a California-based exploration and production company that is making a big bet on the potential of the Monterey shale. The company currently is producing approximately 18,000 BOE/D from its offshore and onshore fields in the Sacramento basin and its longer life southern California properties including offshore Monterey shale properties. However the real upside resides in the huge onshore Monterey shale acreage position the company has acquired over the last few years. The company currently holds 267,000 gross acres in onshore Monterey shale and has made this the focus of its capital deployment for 2011. The company recently announced that it intends to spend $100 million drilling 30 wells, of which 22 are to be horizontal wells, in the Monterey shale. In addition the company intends to complete a 3-D seismic shoot of its Monterey properties to identify potential drilling locations along with increasing its already substantial acreage position.
Venoco has recently reached total depth on its seventh evaluation well along with completing its second and third horizontal well. The company continues to drill its eighth evaluation well and fourth horizontal well. I expect results of these recent wells to be announced during the company’s upcoming earnings report. Venoco also indicated at a recent industry conference that it intends on adding a third drilling rig to the Monterey play in March of this year.
On the negative side, the first Monterey horizontal well that was drilled by the company had a very high water cut and was abandoned as uneconomic. However I would not take too much away from this one well. The experience from other shale plays shows that after accumulating a large acreage position exploration companies have to go through a “science project “ period to identify the best drilling, completion and fracking techniques to unlock each particular shale. This is the period Venoco is currently in and the 2011 drill program should go a long way in determining how prospective the Monterey shale play will be for Venoco. Although unproven and therefore a larger risk the sheer vastness of the potential of the Monterey shale as indicated by other shale plays in the U.S., coupled with Venoco’s large and growing land position, make Venoco an interesting speculation for risk adverse investors.
Disclosure: I am long VQ, EOG.