I’ve been itching ever since we began talking about West Texas oil — the Permian Basin, including the Spraberry and Wolfcamp formations.
Oil is flowing from this shale patch at an alarmingly high rate. But besides a boom for the local economies and a kick in the pants for America’s energy future, there’s surely some ways to play it!
Originally I was going to give you a playbook on how to profit from the Spraberry and the up-and-coming Wolfcamp.
Then I realized how stupid that would be…
Stupid?
Why?
Well, frankly, although I’ll cover some of the other players in the area, you really don’t need a playbook…you only need to know one name.
Our old friend Pioneer Natural Resources (PXD) is back in the limelight.
Besides being a solid player in the Eagle Ford of South Texas, Pioneer has stunning potential in the Permian basin — including the Spraberry and Wolfcamp.
If you’re wondering where this asset fits in the grand scheme of things, take a look at this doozy:
As you can see the Spraberry/Wolfcamp field has the 2nd highest total recoverable resource of any oil play in the world. This is the “bonanza” find the U.S. has been waiting for.
Recently we covered the Spraberry.
Real quick, let me introduce you to the Wolfcamp shale.
The Wolfcamp is located in the Permian Basin, deeper than the Spraberry — instead of 7,000-8,000 feet, we’re looking at 8,000 to 10,000 feet. And as is the case with any shale play in the U.S. there’s different characteristics between the Spraberry and the Wolfcamp.
The most important thing that you and I need to know is that the Wolfcamp is proving to be much more economic with horizontal wells. So instead of the Spraberry wells that are predominantly vertical, the Wolfcamp wells are utilizing horizontal laterals with an additional 7,000 feet — in other words, the Wolfcamp well goes down 8,000-10,000 ft and then horizontal an additional 7,000 ft.
Another thing to understand is that the Wolfcamp is directly under the Spraberry.
That’s huge.
Not only does that mean there is 3,000ft+ of production zone (anywhere from 7,000 to 10,000ft below the surface), it also means you can drill multiple wells from the same pad site.
“We are in a fortuitous position,” says Tim Dove, COO of Pioneer. “By virtue of us having acquired all this acreage and having drilled literally thousands of vertical wells — maybe 7,000 vertical wells — we hold a lot of production. It just so happens that sitting under all the [Spraberry] leasehold we have, which I said is 800,000 plus acres, are the series of [Wolfcamp] shale plays for which we can now drill stacked laterals.”
Stacked laterals and pad drilling mean Pioneer is able to save on the avg. cost per well and lower the time it takes to drill each well. Not to mention these wells look to be very productive — for vertical Spraberry/Wolfcamp wells the estimated ultimate recovery (EUR) is around 140 thousand barrels (over $14 million in today’s market), for horizontal wells the EUR jumps up from anywhere above 450 thousand barrels to as much as a million barrels (that’s $46 to over $100 million, per well!)
There’s a scary amount of potential here.
But get this: Pioneer is still delineating this play.
(In case you missed what I just said) Pioneer is still delineating this play! That is, they’re still figuring out their game-plan here.
During 2013 the company plans to drill a total of 30-40 wells in various formations in the Permian. Middle Spraberry, Jo Mill, Lower Spraberry, And three Wolfcamp zones (A, B and D.)
Regardless of all the names and drill plans, one thing is clear, Pioneer hasn’t even hit its stride yet. When this company does hit its stride, the oil (and profits) could be enormous.
I don’t want to get ahead of myself, but with the acreage package that Pioneer has — this could be the biggest, U.S., oil, profit opportunity we’ll see in the next few DECADES.
You’ve got to read between the lines, here. Sure, the company has seen some positive wells of late — heck, that’s why share prices shot up 20% after they delivered Q2 results. But, the best is yet to come. If the company is still delineating its play, by definition that means they aren’t running at full efficiency. When that happens look out!
We’re dealing with what could be the biggest shale oil play in the U.S. and Pioneer is the first horse out of the gate (not to mention its pedigree is fantastic.)
The Little Red Hen Of The Permian
Have you heard the story of the little red hen?
Some fluffy little hen out in the barn wanted to make some bread. After asking around for other animals to help her, she got a bunch of “I wont’s” — so she proceeded to make the bread herself.
Later on, when the bread comes out of the oven and the little hen wants to know if anyone will help her eat it, turns out she gets plenty of “I will’s.” But by then it’s too late, the little red hen just shares the bread with her chicks.
From a 30,000 ft view, Pioneer is the red hen in the Permian. They seem to be ramping up in a huge way and “pioneering” their way to the most profitable well design.
Sure, other drillers out there are using some impressive technology and you can’t compare them to lazy barn animals — but, Pioneer’s hard work is shining through and should soon payoff.
Unlike the original hen story, I bet some of the other drillers in the Permian will benefit, handsomely, from Pioneer’s hard work.
One of the other big land holders in the area is Occidental Petroleum (OXY.)
Again, I don’t want to downplay OXY’s technology or expertise — but they simply aren’t moving as fast as Pioneer. That doesn’t mean OXY won’t benefit though…
OXY is a huge domestic oil producer. According to the most recent company data, OXY produces 478 thousand barrels of oil equivalent per day (boe/d) — That accounts for 62% of its global production.
Drilling down further, OXY’s biggest production zone is the Permian Basin — 60% of which is related to “enhanced oil recovery” (EOR) projects. EOR, for example, is where the company takes existing legacy wells and floods them with CO2 to enhance oil production. Indeed, it’s not the unconventional/shale story we’re used to.
While a company like Pioneer, living up to its name, blazes a new trail in the Permian, OXY is slow to move on unconventional plays (including horizontal drilling and hydraulic fracturing.) For better or worse, this huge oil producer — and massive Permian basin acreage holder — isn’t maximizing its shale exposure.
Truly there’s not much more to say about it. The company holds key acreage in an area that’s starting to bust at the seams with unconventional production. The company could do nothing more than hold its land package, and probably still catch a bid.
Besides that, Forbes recently referred to OXY as a “dividend giant” and your editor agrees. Currently the massive company is paying near a 3% yield. So it might not be a bad “big oil” bet on the Permian.
It’s by no means a pure play, and it’s by no means the profit-potential of Pioneer. But even the rising tide effect could light a fire under this company. Time will tell.
For now I’d back our little red hen — Pioneer is busy at work in the oil kitchen.
Keep your boots muddy,
Matt Insley
U.S. Oil Boom “Bonanza” — Pioneer Hits Pay Dirt In The Spraberry was originally featured in The Daily Resource Hunter. Check out the newest Daily Resource Hunter research video "The Price of Gas Explained".