Investing In The Mississippi Lime - Is It The 'New Bakken'?

Includes: CHK, DVN, RRC, SD, SDT
by: Bruce Vanderveen

North Dakota Bakken Shale has enriched thousands of investors, land holders, and oil companies. Horizontal drilling and improved fracking technology have been the key to unlocking the Bakken's oil riches. For North Dakota, a state previously known mostly for frigid winters and desolate, wide-open spaces, the boom times are especially astounding.

Now, the good fortune may be spreading south to Kansas and Oklahoma. Horizontal drilling and fracking are now being applied to the Mississippi Lime region in northwestern Oklahoma and southern Kansas. The Tulsa World quotes Eagle Energy's CEO Steve Antry as saying: "It's probably the hottest play going in the country." The 350 million year old carbonate deposits, rich in oil and natural gas liquids, have been vertically drilled for over 50 years. Until a few years ago, the region was considered "tapped out."

Look at what Tom Ward, CEO of SandRidge Energy (NYSE:SD), the company most extensively involved in the play, says in SandRidge's recent press release:

We are excited to announce this Joint Venture with Repsol, a global energy leader, and we are pleased that they share our confidence in the development potential of this vast Mississippian oil play. We compare the scope of this play to the Bakken and believe it will be transformational for the Mid-Continent region of the United States.

Of course, Mr Ward is not exactly a disinterested outsider. Sandridge has bet heavily on the Mississippi Lime and is now the dominant company in the play. The gamble, however, seems to have paid off in spades for SandRidge.

How SandRidge Is Making A Fortune In The Mississippi Lime

According to a SandRidge document (.pdf), the company has, in the last two years accumulated 2 million acres of Mississippian oil and gas properties at a cost of $350 million. Then, using joint ventures (Atinum Partners and Repsol) and a trust, Mississippian Trust I (NYSE:SDT) SandRidge has monetized $1.83 billion from the properties. Yet, the company still retains interests in 1.5 million net acres. If the figures are correct, this is an astounding accomplishment.

SandRidge is not alone in seeing black gold in the Mississippi Lime. Other companies have also accumulated large net acreage positions (pdf, scroll down). Chesapeake (NYSE:CHK) has 1,100,000 acres, Devon (NYSE:DVN) 150,000 acres, and Range Resources (NYSE:RRC) 45,000 acres.

Fracking Isn't Just For Shale

The Mississippian Lime oil play is a complex, not well understood, carbonate formation, roughly divided into two layers, "chat" and "lime." In the past finding oil here was often "hit or miss." SandRidge, however, saw the potential of fracking carbonate rocks - the same technology that was so successful in the Bakken.

Fracking works well in the Lime because, except for existing natural vertical fractures, the carbonate rocks are "tight" and can be cracked with pressure. Horizontal drilling also increase the odds of intersecting natural vertical fractures which may already contain oil.

Why Mississippian Lime Is, In Some Ways, Better Than The Bakken

Even though estimated ultimate recovery of oil per well may be less than a Bakken well, this carbonate play has certain advantages. Costs much less than Bakken wells for the following reasons:

  • Thanks to decades of drilling, the Mississippi Lime's existing infrastructure is already in place.
  • Oil producing strata is relatively shallow at 4-6,000 feet deep (Bakken wells are about twice as deep).
  • Less pressure is required to fracture carbonate rocks than shale.
  • The Mississippi is close to Cushing in Oklahoma, the largest oil storage facility in the U.S.
  • Pre-existing vertical wells can be utilized for laterals to ramp up production from formerly "depleted" wells.

Should You Invest In Sandridge And Other Mississippian Lime Players?

So, is the Mississippian the "New Bakken?" Perhaps not, but it does seem to be a very profitable for companies such as SandRidge which were in early. Some Seeking Alpha authors have written about a massive price decline in oil. Others are bullish and see an imminent rise in oil's price. If you are persuaded by the bulls, now may be a good time to invest. If you like the bears argument, wait until oil declines and then maybe consider investing in these companies.

In any case, with large international oil companies such as Repsol (OTCQX:REPYY) initiating joint shale/carbonate ventures, the migration to horizontal fracking seems well entrenched going forward.

Disclaimer: This article is informative only - not buy or sell advice. Do your own research and due diligence before investing.

Disclosure: I am long SD, CHK, DVN.

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