Hartstreet LLC: Jagged Peak Is A Top 2017 Permian Oil Stock Pick

| About: Jagged Peak (JAG)
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Summary

The Permian continues to be the premier U.S. unconventional oil play, and operators in core areas should be an investor focus.

Jagged Peak's recent well results have shown significant improvement as better stimulation techniques and longer laterals improve production.

The current stock price below $14/share seems cheap based on its core acreage in the Delaware Basin.

There could be significant upside in 2017, and the acreage is good enough to perform at today's oil prices.

The Permian has become the US flagship of unconventional oil and gas. This basin is driving US unconventional production increases. While other plays decrease, this area has an interesting geology. In the east is the Midland Basin. The west has the Delaware. The central basin platform separates the two. While the geology is somewhat similar, there are huge differences. The CBP has been a successful conventional and EOR play while the other two are unconventional. The Midland Basin has seen more traffic than the Delaware. Below is a list of horizontal wells and production by operator in the Midland Basin:

Name

Well Count

Gas (mcf)

Oil (bbl)

Water

PIONEER (NYSE:PXD)

1,046

97,816,870

68,395,150

17,848,282

Apache (NYSE:APA)

356

42,544,224

14,522,593

5,099,937

LAREDO (NYSE:LPI)

352

80,400,130

21,223,878

2,748,528

XTO ENERGY (NYSE:XOM)

341

175,958,400

21,044,614

4,867,050

ENERGEN (NYSE:EGN)

258

35,943,348

12,159,009

563,506

DIAMONDBACK (NASDAQ:FANG)

235

20,921,748

16,486,359

3,264,032

PERMIAN RES

217

47,722,830

16,169,523

3,984,991

COG OPER (NYSE:CXO)

182

26,462,950

10,743,524

479,157

CHEVRON (NYSE:CVX)

173

112,233,384

12,918,670

16,654,431

CALLON (NYSE:CPE)

166

17,797,688

11,635,760

866,842

PARSLEY (NYSE:PE)

159

19,071,676

10,332,939

1,974,328

ENCANA (NYSE:ECA)

153

24,642,392

12,560,315

384,890

OCCIDENTAL (NYSE:OXY)

129

5,695,943

5,540,428

8,992

RSP PERMIAN (NYSE:RSPP)

126

9,270,055

8,879,421

434,146

EP ENERGY (NYSE:EPE)

88

17,374,518

5,714,774

10,518,040

ENDEAVOR

86

43,705,296

4,654,291

16,094,540

EOG RESOURCES (NYSE:EOG)

78

82,433,256

4,370,390

4,899,724

FDL OPERATING

75

15,644,256

4,101,343

1,712,596

OXY USA

72

12,503,087

3,599,049

1,570

(Source: Welldatabase.com)

Pioneer is the uncontested leader. Apache, Laredo, and Exxon round out the top four. Delaware horizontals in New Mexico and Texas are listed below:

Name

Well Count

Gas

Oil

Water

COG OPERATING

1,072

290,306,624

81,416,720

124,373,520

CIMAREX (NYSE:XEC)

688

371,659,072

66,584,440

54,354,784

DEVON (NYSE:DVN)

587

105,401,424

38,689,776

100,545,900

KINDER MORGAN (NYSE:KMI)

530

889,202,200

555,320,800

1,229,608,580

ANADARKO (NYSE:APC)

504

175,687,264

45,319,224

27,656,562

MEWBOURNE

389

55,821,124

16,729,972

30,972,640

EOG RESOURCES

384

92,489,970

26,420,204

43,577,708

EOG RESOURCES

342

29,332,604

10,094,380

27,923,158

SHELL (NYSE:RDS.A) (NYSE:RDS.B)

297

78,896,460

26,177,158

28,915,796

CHEVRON

194

70,930,450

22,868,900

192,797,136

BOPCO

191

50,933,224

11,954,148

54,031,108

CIMAREX

186

50,201,270

18,772,756

18,994,754

MATADOR (NYSE:MTDR)

181

24,720,246

7,149,163

10,435,496

EOG RESOURCES

177

74,911,540

14,491,426

4,378,012

ENERGEN

169

75,406,590

17,226,294

21,155,958

CONOCOPHILLIPS (NYSE:COP)

149

41,869,296

8,979,468

32,629,416

APACHE

143

13,665,460

6,593,205

20,281,278

RKI

137

36,959,612

5,038,723

11,664,354

Apache

134

36,899,756

8,754,625

4,849,466

OXY

129

17,317,388

10,327,508

416,030

(Source: Welldatabase.com)

Concho or COG Operating is to the Delaware what Pioneer is to Midland. Cimarex also provides an interesting play, but its acreage is in gassier areas. The Delaware provided an opportunity for names not in Midland, or able to grab a sizable foothold. While the eastern Permian may have not been there, many found the west as appealing.

There are very few pure Delaware players traded. Centennial (NASDAQ:CDEV) has acreage southern Reeves and Pecos. Clayton Williams (NASDAQ:CWEI) has limited upside given the deal with Noble (NYSE:NBL). The recent IPO of Jagged Peak Energy (NYSE:JAG) provides another Delaware pure play, and recent well results have provided some interesting data.

(Source: Welldatabase.com)

Its locations cover several counties. The majority are in Ward, with some work done in eastern Reeves and north Pecos counties. Not all the wells were completed by Jagged. Clayton Williams, Elevation Resources, and Whiting (NYSE:WLL) are a few of the names. Whiting sold its Ward acreage in 2013, and hindsight is 20/20. At one time, it had over 73K net acres in Ward, Reeves and Pecos counties. Although a little off topic, the move was great for JAG. I pulled the data on all currently owned horizontals. There are a total of 37 in the Delaware Basin.

(Source: Welldatabase.com)

The most interesting aspect of the type curve above is the difference in production by location. There are several wells that haven't reached 50K BO after many years online. The time line is in months, and one well has produced for over seven years. Although the geology hasn't changed, we see a huge increase in oil production for newer designs. The further to the left, the more barrels have been pulled from the ground. Of the 37 completions, 29 have production data.

Type Curve:

Month

Oil

Gas

BOE

Wells

1

4,258.91

3,777.53

4.91 MBOE

29

2

11,741.38

11,851.07

13.79 MBOE

29

3

11,361.41

12,586.18

13.53 MBOE

29

4

9,378.78

10,884.67

11.26 MBOE

29

5

7,746.66

9,073.29

9.31 MBOE

28

6

6,641.24

7,469.49

7.93 MBOE

28

7

6,231.89

6,518.04

7.36 MBOE

28

8

5,451.58

5,895.97

6.47 MBOE

28

9

4,546.73

4,323.41

5.29 MBOE

26

10

4,422.97

4,149.72

5.14 MBOE

26

11

4,295.48

4,801.46

5.12 MBOE

26

12

4,064.73

5,016.20

4.93 MBOE

25

13

4,473.07

5,393.47

5.40 MBOE

25

14

2,966.58

3,404.99

3.55 MBOE

23

15

3,025.47

4,323.21

3.77 MBOE

23

16

2,728.51

3,693.49

3.37 MBOE

23

17

1,975.00

2,669.61

2.44 MBOE

21

18

1,800.83

2,282.60

2.19 MBOE

21

19

1,480.29

1,544.97

1.75 MBOE

20

20

1,717.05

2,351.22

2.12 MBOE

20

21

3,034.55

3,613.13

3.66 MBOE

19

22

1,216.77

2,310.86

1.62 MBOE

19

23

1,139.85

2,163.37

1.51 MBOE

19

24

1,131.61

2,290.88

1.53 MBOE

18

(Source: Welldatabase.com)

To decipher the reason for these production changes, I pulled Jagged's six most recent wells. These are plotted on the graph below:

(Source: Welldatabase.com)

It looks as though every one of these wells will produce over 200K BO in the first 360 days of production. That doesn't mean it will happen with surety, but the current production curve points to this occurring.

Type curve:

Month

Oil

Gas

BOE

Wells

1

8,892.42

8,757.58

10.40 MBOE

6

2

25,778.17

26,592.50

30.36 MBOE

6

3

30,570.50

32,205.83

36.12 MBOE

6

4

25,310.18

26,907.94

29.95 MBOE

6

5

22,884.79

23,474.84

26.93 MBOE

5

6

19,753.52

19,990.34

23.20 MBOE

5

7

18,623.21

17,639.09

21.67 MBOE

5

8

16,338.50

15,958.70

19.09 MBOE

5

9

15,057.81

14,700.55

17.59 MBOE

3

10

14,742.92

13,868.31

17.13 MBOE

3

11

13,205.41

12,220.39

15.31 MBOE

3

12

11,575.83

13,387.29

13.88 MBOE

2

13

15,741.79

20,304.56

19.24 MBOE

2

(Source: Welldatabase.com)

More importantly, the locations are spread out and not on one pad. These wells cover the length of its acreage without Pecos. This six well average produces over 238K BO and 246K Mcf in 13 months.

(Source: Welldatabase.com)

It has expanded lateral lengths, with a range of 8,000 to 11,000 feet.

(Source: Welldatabase.com)

The above graph shows total depth in feet. It has also increased proppant volumes. In Cilantro 2524-C3 1H, it used over 19 million pounds of sand. This expansion of design is producing significant volumes of crude. Given the early stages of its results, it is possible there is a lack of understanding as to its well economics. The six locations will reach payback in approximately one year at today's oil price. We continue to see operators in West Texas produce much better results. We expect this to continue, as slickwater and better source rock stimulation drive oil production per foot. We currently have a price target of $26 over the next 12 to 18 months.

Disclosure: I am/we are long JAG, APA, APC, CDEV, CPE, CXO, DVN, ECA, EGN, EOG, FANG, MTDR, OXY, PE, PXD, RSPP, XEC.

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: This article is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. Well data is provided by WellDatabase. Accordingly, the publication of articles should not be construed by any consumer and/or prospective client as a solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the internet. This information is provided for guidance and information purposes only. This information is not intended to provide investment, tax, or legal advice. The information contained herein has been compiled from sources deemed reliable and it is accurate to the best of our knowledge and belief. However, I cannot guarantee its accuracy, completeness, and validity and cannot be held liable for any errors or omissions. All information contained herein should be independently verified and confirmed. Hartstreet LLC does not accept any liability for any loss or damage whatsoever caused in reliance upon such information. Readers are advised that the material contained herein should be used solely for informational purposes. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Welldatabase.com provided the data for this article. There may be a delay between upcoming articles because we are working on securing investments for Hartstreet's O&G Fund.