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Shale Plays Gone Wild - The Woodford

Posted: Apr 13, 2009 11:17 AM by Eric Fox

Tickers in this Article: CHK, CEG, CEP, PQ, BP, NFX, DVN

The Woodford shale is not a new discovery. This shale underwent a boom in 2007 and 2008 due to the application of horizontal drilling combined with higher natural gas prices. Only time will tell whether this shale's profitability will continue without the tailwind of high prices.

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Geology
The Woodford shale is located in Oklahoma's Arkoma basin, which straddles the Oklahoma and Arkansas border. The shale is a late Devonian/early Mississippian formation that was deposited approximately 350-400 million years ago. The first well was drilled into the Woodford shale in 1939, but the area was long dormant until recently when new technology was applied to the formation.

Drilling History
As of August 2008, more than 577 wells have been drilled into the shale, and almost all have been drilled since 2004. Exploration and production companies have drilled 75% of these wells horizontally. The results for the horizontal wells have been much stronger than for vertical, with higher initial production rates. (Learn more about these companies in Unearth Profits In Oil Exploration And Production.)

The Players
There are several large energy companies involved with the Woodford shale. Perhaps the largest is BP (NYSE:BP), which purchased 90,000 acres from Chesapeake Energy (NYSE:CHK) in August 2008 for $1.75 billion. BP estimated that its production from the Woodford would double as a result of the transaction. BP seems to be one of the few majors to take a strong interest in North America, as some of the others tend to focus on large international projects. Chesapeake Energy, which was conducting an asset monetization program to lower its leverage and increase liquidity, is focusing on other shale plays.

Constellation Energy Partners (NYSE:CEP) also has an interest in the Woodford, and bought a select set of wellbores in March 2008 from Constellation Energy Group (NYSE:CEG), which owns 28% of the company. Since these properties are non-operated, Constellation Energy Partners currently does not have an active drilling program here.

Few companies have bet as much on the Woodford shale as Newfield Exploration (NYSE:NFX), as its property in the Woodford is the company's largest asset. Newfield has 165,000 acres under net lease, and as of January 2009 was producing 250 MMcfe/d (million cubic feet equivalent per day) of natural gas.

Devon Energy (NYSE:DVN) is a major operator in the Woodford, where the company is targeting the area with $112 million in capital in 2009, and will drill 26 wells. (Read more in Accounting For Differences In Oil And Gas Accounting.)

Petroquest (NYSE:PQ) is a small cap company that is currently drilling in the shale. The company has spent the last several years transforming from an offshore Gulf Coast company to a company with more diversified assets and long-lived reserves. Petroquest has 48,000 acres under net lease in the area, and believes it has from 360 to 720 locations depending on the spacing it uses for drilling.

The Bottom Line
The Woodford shale play holds much promise for the exploration and production industry, but like all drilling, it is feeling the impact of lower natural gas prices and restricted capital investment.

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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