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Shale Acreage Can Be Misleading

Posted: Oct 27, 2009 15:47 PM by Eric Fox

Tickers in this Article: WLL, BEXP, DVN, CRZO

Exploration and production companies love to tout the number of acres under net lease in the various shale plays in North America. This statistic, however, can be misleading, as it says nothing about the location and the quality of the acreage or how productive these assets are.

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One method of examining the vast differences between acreage in the same shale play is by looking at the most developed shale play in the United States, the Barnett Shale. Located in the Fort Worth Basin in Texas, the Barnett Shale has evolved over time into a core area and Tier One and Tier Two areas. The shale encompasses a 14 county area in Texas.

Location, Location
One company that has acreage there is Carrizzo Oil and Gas (Nasdaq:CRZO), which has 60,000 acres under net lease. The company is using an average estimated ultimate recovery (EUR) per well of 3.8 Bcfe in the core area, where it has 21,000 of its acres. The Tier One area has an EUR per well of only 1.6 Bcfe and the Tier 2 area an EUR of 800 million cfe.

Devon Energy (NYSE:DVN) has the majority of its Barnett Shale assets in the core area. The company has 73% of its 696,000 acres in what it calls the primary area.

The Barnett Shale has been under development for years, but in newer shale plays, it is not yet settled which acreage is more productive. The Bakken Shale is a newer play, and the industry is rushing to develop it.

The Newest Contender
Brigham Exploration (Nasdaq:BEXP) is involved in the Bakken Shale and some of its wells have had very high initial production rates. The latest was the Brad Olson 9-16 #1H, which produced at a 2,112 barrels oil equivalent rate during its first 24 hours.

The company also recently completed two other wells that produced above 2,000 BOE as initial production rates. Clearly Brigham Exploration has some of its acreage in highly productive parts that might comprise a future core in the area.

Whiting Petroleum (NYSE:WLL), another exploration and production company in the Bakken Shale, reported a well with the highest publicly disclosed initial production rate. The Richardson Federal 11-9H produced 4,570 BOE per day during its 24-hour initial test period.

Some might look at valuations of various companies involved in these plays by calculating the market capitalization per acre under lease. But this statistic will not distinguish between the productivity of the acreage.

The Bottom Line
An investor who put too much emphasis on the amount of acreage an exploration and production company has, and not the quality of that acreage, might be in for a surprise when the acreage is developed. It's quality not quantity that is important. (For a primer on the oil industry, refer to our Oil and Gas Industry Primer.)

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By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

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