It has now been almost five months since Apache (NYSE:APA) first announced the discovery of its new resource play, "Alpine High", and at long last the completion reports on the initial wave of producing wells have been filed. I was anxiously awaiting these reports because they provide important information needed to evaluate Apache's development of the play, including gas-to-oil ratio ('GOR'), lateral length, landing zone, etc.
After reviewing these reports and in anticipation of Apache's upcoming earnings call on February 23rd, I thought this was a good opportunity to provide Apache investors (and others) with a comprehensive update on Alpine High.
Because there has been so much activity over the past seven months, I have broken this article into five separate areas: 1) 2016 completed Woodford/Barnett wells; 2) 2016 Wolfcamp and Bone Springs activity; 3) wells spudded in 2016 and "waiting on completion"; 4) wells permitted in 2016 and "waiting to be spud"; and 5) wells permitted in 2017.
Finally, I provide my analysis and thoughts on the "Importance of a 'Paleo-High'" in the last section in which I explain Alpine High's unique geological setting and why understanding that setting is key to understanding the enormous potential (as well as the risks) of the play. But first, a little background material to help orient you.
Figure 1 shows a general location map showing Reeves County, surrounding counties, Apache's Alpine High acreage and a few key geographical points, including the two main towns within the Alpine High footprint: Toyah, TX, and Balmorhea, TX. I will use these two towns as general reference points throughout the article.
Figure 2 is a map of Alpine High upon which I've marked the location of certain key sections which form the general outline of the play, which now totals 320,000 net acres (Source: APA Q3 Earnings). I also wanted to highlight the massive size of Apache's acreage by showing the distance from the northwest section of the play to the southwest section - 62.83 miles. To put that distance into some perspective, Midland County, which is in the heart of the Midland Basin, is only 30 miles across. I think investors have yet to fully appreciate the size of the opportunity here.
How did Apache amass such a large acreage position in secret? In large part by hiring two well-known, experienced land consultants (a/k/a landmen) R&J Graham Energy, Inc. and Wolcott, LLC. Over a period of many months, the two land consultants negotiated lease agreements with private owners and bid at auction on publicly owned land/mineral rights. After the leases were signed and the paperwork complete, the leases were assigned to Apache. (Source: Texas Land Office records).
II. 2016 Barnett and Woodford Completions
Apache's principal targets in Alpine High are the Barnett and Woodford formations. The Barnett is Mississippian in age whereas the Woodford is Devonian. Apache has now completed a total of eleven producing wells in these two formations and, as shown in Figure 3, all but one were completed in the Woodford.
Figure 3 - Alpine High 2016 Completed Woodford/Barnett Wells
It is important to note that all of the wells completed in Barnett and Woodford are being classified as gas wells. Under Texas law, if a well produces less than 1 barrel of oil per 100,000 cubic feet of gas (100mcf), the Texas Railroad Commission classifies it as a gas well. However, the good news is most of the wells appear to be "liquids-rich", which is generally defined as a well having a yield greater than 10 barrels of NGLs for every MMcf of gas processed.
In addition, the wells in Figure 3 are listed in order according to depth of the Woodford formation (where possible). I have done this because understanding the depth of the Woodford is an important key to understanding the hydrocarbon profile of a particular area of the play and of any individual well.
I will go into further detail below in the section titled, "The Importance of a 'Paleo-High'". But for now, even with this limited sample, it is fairly evident that the depth of the Woodford is determinative of a well's production profile. For example, the Woodford top of the Mont Blanc #1H is 11,764' and the well is 99.5% gas. On the other hand, the Woodford top of the Cheyenne #1H is 1,700' shallower and the well is 87.1% gas.
Figure 3 - Alpine High 2016 Completed Woodford/Barnett Wells
Figure 4 is a map plotting the location of the completed Woodford and Barnett wells listed in Figure 3. Again, even though the data thus far is limited, it is evident that the Woodford is deepest in the Toyah area and is shallower further south towards Balmorhea.
Figure 4: Alpine High 2016 Completed Woodford/Barnett Wells Map
III. 2016 Wolfcamp and Bone Springs Activity
Figure 5 shows the location of wells drilled in the Wolfcamp or Bone Springs formations. The Redwood #1P was permitted as both a vertical exploratory and Woodford horizontal. According to Apache, the vertical section started to produce oil in the Wolfcamp while they were drilling, so they decided they better measure it. The measured IP rate was 700 bbls of oil and 4,500 mcf. (1,300 BTU) which is pretty darn good. The well was later completed horizontally in the Woodford (see Figure 3). What this shows is that the Wolfcamp is productive in this area and, indeed, a well specifically targeting the Wolfcamp on this lease (Redwood #2H) has been drilled and is waiting for completion.
Figure 5 - Alpine High 2016 Wolfcamp and Bone Springs Activity
Figure 5 also shows wells drilled in the Bone Springs: the Mont Blanc #2H and four wells on the Ladybird State lease. The Mont Blanc #2H was completed in the 3rd Bone Springs in July, 2016 and has produced 40,391 boe (71.9% oil) as of November, 2016. The four Ladybird State wells were all drilled and/or completed in July-August 2015 and yet no completion or production information has been filed. Although it is hard to believe Apache drilled four wells only to then find out that the Bone Springs was not productive or economic in this area, the fact that Apache has not disclosed any information means that the area remains a big question mark. For now, I'm going to assume that Apache has decided not to test the Bone Springs any further in this area.
IV. Wells Spudded in 2016 and 'Waiting on Completion'
Figure 6 is a map showing the location of wells spudded in the Toyah area but awaiting completion. Since all are still "wildcat" wells, no information is available on the target zone, but I have included the spud date to provide some clue as to when completion should have been finished. For example, the Redwood #1H, #3H and #4H wells were all spudded in mid-September 2016 and should have been completed by November. So I would fully expect one or more of these wells to be highlighted in Apache's Q4 2016 earnings release scheduled for February 23rd.
Figure 6 - Toyah Area Wells Spudded and 'Waiting on Completion'
Elsewhere on Figure 6, I would expect the two Black Hawk State wells (spudded December 2016) to be reported in Apache's Q1 2017 earnings and the two remaining horizontals, Mont Blanc #5H and Dakota #1H (spudded January 2017), to be reported in the company's Q2 earnings.
Figure 7 is a map showing the location of wells spudded and awaiting completion in the Balmorhea area (including Pecos County). The Alta #3H and the Weissmies #3H and #5H were spudded in September 2016 and, again, I would fully expect Apache to report completions on 1 or more of those wells in its Q4 2016 earnings report.
Figure 7 - Balmorhea Area Wells Spudded and 'Waiting on Completion'
Also in Figure 7 are three King Hildalgo wells spudded in Pecos County. Hopefully, Apache will report a completion on at least one of these wells. If they do not, it may well be an indication of a lack of productive zones in this area. It almost goes without saying that companies are loathe to report poor well results and so "no news" often means "bad news".
V. 2016 Permits Waiting to be Spud
Figure 8 is a map showing Toyah area wells permitted in 2016, but not yet spudded. I would expect many of these wells to be spudded in the 1st half of this year. However, I suspect some permits will be allowed to expire, such as the Black Hawk #3H where it appears Apache has decided to change the configuration of the drilling pattern in this lease from NE to SW to N to S.
Figure 8 - Toyah Area 2016 Permits Waiting to be Spud
Of particular interest are the Huckleberry #1H, #2H and #3H, all permitted in September 2016. These are potentially significant wells because they will be the most northerly Alpine High wells to date. I would expect any Woodford completions very gassy since the Huckleberry lease is located 6.0 miles northwest of the Mont Blanc #1H, which was 99.5% gas. Also, note that the Spruce State #1H is the longest lateral to date: 10,032 feet.
However, most interesting are the ten wells permitted late last year on the Dogwood State lease. I believe these wells will be a spacing test, which is a very important step in planning the development of Alpine High. Figure 9 is a portion of Apache's Plat Map for the Dogwood State lease which shows the layout of the permitted wells.
(Figure 9 - Portion of Dogwood State Plat Map
If you look at the between-well spacing, you can see that wells #1H, #2H and #3H have 660' between wells, whereas wells #4H, #5H, #6H #7H, #8H and #9H all have 330' spacing. Most importantly, the Dogwood State #1M is to be a vertical monitoring well, which I believe will be used to assess whether there is any "communication" between the fracs of laterals #6H and #7H. That knowledge will help Apache refine their completion technique.
Figure 10 is a map showing Balmorhea area 2016 permits waiting to be spud (including one King Hildalgo well in Pecos County). None of these wells are particularly interesting or remarkable.
Figure 10 - Balmorhea Area 2016 Permits Waiting to be Spud
VI. 2017 Permits
Figure 11 is a map plotting all wells permitted thus far in 2017. Of particular interest are the two verticals wells: Orion #1 and Pegasus #1. These were permitted as exploratory wells and are true "step-out" wells, as the closest completed well is the Denali #1H, 5.9 miles to the southeast. The 2017 Dakota and Cheyenne permits are good news in the sense that there are other wells already drilled on these leases, and getting additional permits implies that Apache has confidence additional wells will be economic.
Figure 11 - 2017 Permits (through January 2017)
VII. The Importance of a "Paleo High"
In this last section, I want to take the time to explain one of the most important or at least interesting aspects of Apache's Alpine High discovery. That is, Apache's determination that its Alpine High acreage is located on a 'Paleo High'. But what the heck does that mean, exactly? Basically, it means that, whereas the rest of the Delaware Basin sunk after 'paleo times' (i.e. after the Barnett and Woodford formations were deposited), the Alpine High area remained relatively stable (although with significant faulting). And as a result of "staying high", the hydrocarbons in the Woodford and Barnett never got cooked away by the heat created by the pressure of depth. Previously, the general belief in the E&P industry was that this part of southern Reeves County was once as deep as the rest of the Delaware Basin, but was "pushed high" by tectonic events. In other words, it was believed the Woodford and Barnett would be as gassy as they are in the rest of the Basin. However, as Apache CEO Christmann emphasized on the Alpine High announcement conference call: "... it [Alpine High] was always in the oil and wet gas window. It is not dry gas."
But where exactly is the dividing line between the oil/wet gas window and the dry gas window in southern Reeves County? Apache provided an important clue on a map on page 24 of the Alpine High presentation, which I have reproduced as Figure 12.
Although not identified by Apache in its presentation, I have determined that the "outside operated" wells circled in Figure 12 are all dry gas wells currently operated by Concho Resources (NYSE:CXO) (originally drilled by Chesapeake between 1/2007 and 9/2009)
These wells are listed in Figure 13 and ordered by depth - shallowest to deepest. I have plotted those wells in Figure 14, including two early Apache wells as reference points.
Figure 13 - Toyah Area Outside Operated Gas Wells
Figure 14 - Toyah Area Offset Gas Wells By Depth (swallowest to deepest)
There are two important points I want to make here - first, that the shallowest offset dry gas wells (wells #s 1 to 7) are, indeed, just north of Alpine High acreage. And second, the dropoff from the "Paleo High" shelf into the basin is dramatic. For example, the top of the Woodford at well #3 (Robertson State 60 #1H) is at 10,505' whereas the top of the Woodford at well #8 (Grove State 72-21 #1H) is 12,600', a difference of almost 2,100 feet!
Second, I believe this data indicates that Apache was smart enough to gobble up all the acreage it could which it believed could be within the oil/wet gas window. In other words, I believe it is likely all acreage north of Alpine High (in both the Woodford and Barnett, at any rate) is just dry gas. So be wary of those claiming their microcap stock has good acreage "close to Alpine High". In this area, "close" probably won't cut it.
VIII. Final Comments
2016 was, quite literally, a groundbreaking year for Alpine High. Apache was able to confirm its theory that Alpine High was on a shelf-like "paleo-high", that the Woodford and Barnett would be productive horizontal targets, and it placed twelve wells on production.
As 2017 progresses, Apache will continue to ramp up activity as there are fifteen spudded wells which soon should come into production. There are also thirty-six wells permitted and ready to be drilled. Most interesting is what I believe is a spacing test planned for the Dogwood State lease which, if successful, might mean up to 50% more wells per section as well as two 'step-out' exploratory wells (Orion #1 and Pegasus #1) that could open up a whole new area for exploration late this year or in 2018.
With respect to the upcoming conference call, I am going to pay particular attention to the wells and leases Apache highlights to provide clues as to any new areas of the play that have been 'de-risked'. I am also going to pay close attention to wells that Apache decides NOT to mention because, as I said before, "no news" can often mean "bad news", and it is up to each investor to ferret out and assess that type of information.
Disclosure: I am/we are long APA, CXO.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Opinions expressed herein are not an investment recommendation and are not meant to be relied upon in investment decisions. This is not an investment research report. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice. The author explicitly disclaims any liability that may arise from the use of this material.