Competing Independents See Upside On Apache's Granite Wash Acquisition

by: Todd Campbell

The focus on wet natural gas continues with Apache Corp (NYSE:APA) picking up Cordillera Energy Partners, which owns 254k net acres in Oklahoma and Texas, in a deal worth $2.85 billion. The deal boosts Apache's holdings in the Anadarko basin by 71.5 million barrels of oil equivalent ("BOE") in proved reserves.

The focus on Granite Wash isn't surprising. Apache has long targeted the Anadarko basin and has been leveraging horizontal drilling to exploit liquids rich production in the Granite Wash. Apache will be able use this experience, and resources already hard at work in the play, to more quickly develop the acquired acreage. In Apache's history, the company has drilled 2500 Anadarko Basin wells, with 500 drilled in the Granite Wash alone. The pace is set to quicken, with Apache planning to drill 160 wells in the Cordillera properties this year.

The Granite Wash is made up of a series of liquid rich sandstone and conglomerates layers, which offer strong horizontal drilling yields. At Apache, the use of horizontal techniques has doubled the company's oil and liquids production over the past two years. And, the company reports it hasn't drilled a dry hole in the formation since 2009, when it instituted horizontal drilling.

Apache's acquisition came alongside an announced 8% production cut by Chesapeake Energy (NYSE:CHK), which also operates in the Granite Wash, and a 66% cut in Marcellus Shale unproven reserve estimates by the Department of Energy.

If news shifts investors back toward natural gas, Apache may find the Cordillera acquisition even more profitable. Other neighboring operators would similarly benefit, as natural gas production exceeds 50% of well production in the Granite Wash.

These companies include Linn Energy (LINE). Linn doubled its Granite Wash exposure in November, spending $600 million to acquire Plains Exploration & Production's (NYSE:PXP) acreage. The deal increased Linn's production by 75%, giving it 263 billion cubic feet of estimated proved reserves, and 20k net Granite Wash acres. Linn has 50k net acres in the Texas Panhandle, including the Greater Stiles ranch, and another 25k acres in Oklahoma. Linn, whose shares yield 7.5%, just completed a 17 million unit offering, raising nearly $600 million.

Forest Oil (NYSE:FST) is another player, holding 103k net acres in the Granite Wash. The stock surged 8.75% following Apache's deal. The company has focused 80% of its capex on liquids rich horizontal drilling, which has helped it increase liquids to 45% of its total production. In 2012, the company plans to continue to focus spending on its Texas panhandle acreage. In November, the company reported seven newly completed Granite Wash wells were producing 45% liquids, or 1100 bbl/d.

Unit Corp (NYSE:UNT) is also benefiting from Granite Wash through 36k net acres and 21 operated horizontal wells. Additionally, Unit operates a midstream operation in the Granite Wash. The company expanded its Granite Wash processing capacity by 140% yet remains at full capacity, indicating additional capacity slated for Q2 2012 will be well received.

Chesapeake Energy, which has its hands just about everywhere, has 200k net acres. The company IPO'd its Granite Wash Trust (NYSE:CHKR) in November. With a 10% dividend yield the trust receives 90% royalties on 69 existing wells and stakes in 118 others. Chesapeake has 200 million boe of proved reserves in the Granite Wash and shares of the Granite Wash Trust have increased from $19 to nearly $24 since its IPO.

Finally, Devon Energy (NYSE:DVN) has also focused on liquids rich wells. The company saw its liquids production increase 17% year over year in Q3 as it brought 10 Granite Wash wells online. Those wells averaged 1250 boe/d, bringing Devon's Granite Wash production to 16,400 boe/d across 63k net acres.

As investors digest the rapid deal flow news, eyes will focus on emerging unconventional plays and activity. If producers can better manage natural gas supply, pricing provides a bit of relief -- particularly if growth in oil production begins to weigh on crude .

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