Looking For The Next Big Shale Play In 2012

by: Todd Campbell

America's appetite for drilling remains intact, with 2324 crude oil exploratory or development wells being drilled in November, up from 1928 back in June. The level of activity is the highest since the mid 1980's, suggesting it makes sense to look at recent shale news, with an eye on 2012 opportunities.

In the Bakken shale, production has climbed above 500k bbl/d, up 43% from last year. North Dakota's production is likely to eclipse California to become the second largest producer behind Texas. More and more volume is ending up traveling by rail. The deferring on the Keystone XL adds upside to rail operators, who have been enjoying robust petroleum carload growth. Emblematic of the robust production growth, Canadian Pacific Rail (NYSE:CP) is shipping 13,000 carloads out of Bakken, up from 500 two years ago. Furthermore, the company expects it could ship 70,000 in the future. In Union Pacific's (NYSE:UNP) earnings call, the company cited 46% growth in rail crude carloads, thanks to Bakken and Eagle Ford.

At Eagle Ford, production through October increased to 13.8 million barrels in 2011, up from 4.37 million barrels in 2010. Current production could double as foreign oil companies buy minority stakes in deals with independents. Marubeni Corp, Japan's big grain trader, bought a 35% stake in Hunt Oil's Eagle Ford acreage for $1.3 billion this month. And, Oil India Ltd, the state owned oil arm, is set to spend $200 million acquiring a minority stake in Eagle Ford soon too. Last year another state-owned Indian oil company, GAIL Ltd, bought a 20% stake in Carrizo's (NASDAQ:CRZO) Eagle Ford acreage.

California remains the number two oil producer, as Occidental Petroleum (NYSE:OXY), the largest owner of Monterey Shale acreage, ramps activity. Occidental spent $1.6 billion on California in 2011 and is operating 30 rigs. The second largest players, Venoco (NYSE:VQ), approved CEO Tim Marquez $770 million buy-out, which I wrote about back in October. And, Plains Exploration (NYSE:PXP) aims to spend $320 million on California with 116 gross wells planned this year.

Over in Oklahoma, the Mississippi Lime Shale continues to garner attention as Sandridge (NYSE:SD) inks deals for its 2 million acres. Access to this wet play, with oil yields over 50%, is increasingly attractive given sticky high crude prices. Last month, Sandridge announced a billion dollar deal with Repsol SA (OTCQX:REPYF), giving Repsol a minority stake in 363k acres. Back in August, Sandridge landed $500 million from Korea's Atinum Partners. And shares in Sandridge's Mississippian Trust (NYSE:SDT), with a 90% stake in 160 horizontal wells, have climbed from below $19 in October to $32. The company is reportedly shopping its third such deal for the formation. And, Chesapeake (NYSE:CHK) remains active in the play too with 1.4 million net acres, up from 1.1 million net acres exiting Q2.

Back in October, Marubeni, who recently inked the deal in Eagle Ford, picked up a 25% stake in 88k acres in Colorado's Niobrara Shale. The acreage, controlled by Fidelity Exploration & Production, brought in $390 million. This week, Quicksilver Resources (NYSE:KWK) confirmed its first horizontal well on Wolf Mountain was producing at 500 bbl/d. The company also indicated its Thunderhead project could hold 500 million barrels. Sinopec (NYSE:SHI) also picked up exposure with its $2.5 billion deal with Devon Energy (NYSE:DVN), which gave it a one third stake in five fields, including one in Niobrara.

But, foreign appetite for deals isn't limited to the west. In the Utica shale, Total SA (NYSE:TOT) spent $2.3 billion earlier this month buying a 25% stake in 619k acres held by Chesapeake. Back in November, Total SA ponied up $2.25 billion for access to Chesapeake's Texas acreage. Marathon (NYSE:MRO) is already adding capacity to receive up to 12k bbl/d of Utica oil in Canton, Ohio, which could expand to 24k. And, giant Exxon (NYSE:XOM) is starting to get in on the action, picking up 13k acres in Monroe County in December.

Finally, interest in Tuscaloosa Marine Shale in central Louisiana is picking up. The formation is similar to Eagle Ford in age, but sits 10-15k underground. Last week, Encana (NYSE:ECA) reported encouraging results for its test well , where it has three rigs operating and 270k acres. Tuscaloosa could hold as much as 7 billion barrels of oil across its 2.7 million acres. Across the play, a dozen wells are operating from Vernon to Tangipahoa parishes. Goodrich Peteroleum (GDP) announced it will begin spending money in the formation this year.

Interestingly, most of the independents have traded lower so far this year as crude (NYSEARCA:USO) has traded sideways. The deal-making flurry is eerily reminiscent of the global appetite for securitized mortgages, which were pawned off on Icelandic banks near the tail end of the housing boom. For now, the drilling and equipment companies may prove a better bet. And, investor attention should be on the railroads too, which will see earnings growth right alongside shale production this year.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in UNP, SDT, OXY over the next 72 hours.