The Midcontinent is brimming with potential, according to operators at Hart Energy’s fourth annual DUG Midcontinent Conference & Exhibition held in Oklahoma City in October.

Wade Hutchings, regional vice president of Midcontinent assets for Marathon Oil Corp., told attendees the state “is a top priority for Marathon” and added that the firm is increasing its Oklahoma-focused capex due to continuing success in the Scoop and Stack plays.

“This is an exciting and transformative time for Marathon in Oklahoma,” Hutchings said in his opening keynote address. Marathon has been drilling and producing wells in Oklahoma for more than a century “and we expect to be here for a long time to come.”

Following its acquisition of PayRock Energy Holdings LLC in June for $888 million, Marathon has interests in more than 200,000 surface acres in the Stack play; 90% of the acreage is in the oil window. The company operates more than 60% of that acreage along with an average 70% working interest.

Marathon’s proved and probable reserves in Oklahoma have grown by more than five times in recent years to more than 2 billion barrels of oil equivalent (Bboe). “The Stack is one of the best oil plays in the U.S.,” Hutchings said, adding that it “checks all of the boxes” for Marathon and other producers.

A crucial question for the company now is how to make the most profitable use of that big acreage block. To accomplish that goal, Marathon enjoys a “rich, internal data set” on the Stack, Scoop and other plays, and finding the best technology to employ that information is paramount. Marathon has access to 3,700 square miles of 3-D seismic, composed of 2,400 square miles in the Stack and 1,300 square miles in the Scoop, he said.

The unconventional Scoop and Stack’s complexity requires strong collaboration among multiple disciplines—seismic, geology, drilling, completion, Hutchings noted. To encourage cross-disciplinary collaboration, Marathon has created a “war room” where specialists can meet to discuss options on locating, drilling and completing each well. “We ask, ‘What works?’”

Marathon has what it calls a reservoir quality index to optimize well performance, Hutchings said. He added that he sees “a fast pace of stimulation evolution relative to earlier shale plays” in the company’s Meramec operations within the Stack play. This has led to higher initial production rates and increased EURs for wells. These efforts have improved Meramec wells’ internal rate of return (IRR) to as high as 60% to 80%, even at $50/bbl WTI prices, he said.

Innovation takes partners, he added, noting Marathon involves its service providers in the collaboration effort to reduce drilling costs and improve well performance.

“We see considerable upside in Oklahoma through the work of our team players, some of whom have years of experience in the Bakken, Eagle Ford and other unconventional plays, and we are fortunate to have them,” he added.

Oklahoma’s strong regulatory and community support for the industry is a significant positive, but refinements to the law still need to be made, Hutchings said. While 2011 legislation intended to encourage development of the shale plays was an excellent move, “the state needs to expand its shale development to make Oklahoma even more attractive. Everybody will benefit,” he said. He called for continuing “clarity” in regulatory oversight of the industry by the Oklahoma Corporation Commission.

He stressed that Marathon remains “bullish on Oklahoma.” Although the state has produced oil and gas for 120 years, “its energy resources have never been as deep and diverse as they are today.”

Marathon’s initial 2016 capex of $1.4 billion allocated 14% of the budget to Oklahoma’s unconventional plays. The company later cut its overall budget slightly, which had the net effect of increasing the percentage of capex focused on Oklahoma, Hutchings said. For 2017, capital allocation priorities for the Stack play, in particular, will focus first on increasing the company’s leasehold in the play, then delineation and downspacing, to create high-return opportunities.

Industrywide, drilling in the Stack has picked up with the improvement in commodity prices over recent months, he said, noting that currently 28 rigs are running in the play, compared to a nadir of 16 rigs making hole in June. Marathon has three rigs currently working in the Stack.

Partnering up

One small, private independent has staked an outsized position in the prolific Stack play, and it has turned to a DrillCo joint venture (JV) with a private equity provider to fund a portion of its drilling.

Hal Chappelle, president and CEO of Alta Mesa Holdings LP, called the Stack a top North American play at the recent DUG conference. Essentially, the Stack is a juxtaposition of the Devonian Woodford Shale and several Mississippian unconventional reservoirs. These include the Meramec, a silty, carbonaceous shale, and the Osage, a porous carbonate.

Currently, the Stack play is expanding north and west from its established area in Oklahoma’s Major, Kingfisher, Blaine, Canadian and Dewey counties. Stratigraphically, the Stack is expanding across the entire Mississippian section and upward into such Pennsylvanian reservoirs as the Oswego Lime.

Alta Mesa’s acreage is concentrated in the updip oil window of the Stack, primarily in eastern Kingfisher County. To date, the company has drilled 116 horizontal Stack wells, mainly in the Osage Lime. It is also testing Meramec and Oswego with horizontal wells, and it plans a Manning horizontal test in the fourth quarter. The private operator now produces about 13,600 boe/d net from Stack reservoirs.

The company is funding its Stack drilling from cash flow and a DrillCo JV with private equity group Bayou City Energy Partners. “We were able to enter into an agreement in January of this year,” Chappelle said. “We’ve drilled 33 wells out of a 60-well defined package consisting of three 20-well tranches.”

The deal added about $100 million of additional drilling funds during a key time for the company. The money allows Alta Mesa to maintain and develop its leasehold, grow its reserves and continue to define the resource.

The DrillCo partner funds 100% of the drilling and completion cost, capped at an average of $3.2 million per well. For that, the DrillCo initially receives an 80% working interest in the wellbore. There’s a sliding scale for the DrillCo working interest, which gets reduced as IRRs increase. Specific wells are pre-agreed for each tranche.

The infusion of capital has allowed Alta Mesa to continue climbing the learning curve in the Stack play. Chappelle said 3-D seismic surveys are a key tool for the company. It is currently completing a very high-fold, high-frequency survey that it will use for well planning.

It has also progressively modified its completion designs. Generally, Alta Mesa is increasing the number of frack stages in its stimulations, decreasing stage spacing and increasing average sand per foot. Its most recent wells have been tracking above its type curve of 640 Mboe. Additionally, the operator is testing well density spacing, with several pilots underway.

“We’ve got a large, continuous leasehold; we have a great team with experience and good partnerships with vendors,” Chappelle said. “We’ve progressed in our drilling and completion strategies to where we have repeatable, consistent results. Certainly, every well is a challenge, but we feel that we have a process that helps us define how best to exploit this acreage.”

Alta Mesa Stack production is predicted to continue its growth through third-quarter 2016.

Pure play

Gastar Exploration Inc. has taken several measures to ensure it can develop its Stack acreage. It recently announced a revised financial arrangement with its bankers, a new investment partner in a DrillCo and a noncore asset sale. All these moves mean Gastar is poised to drill more Stack wells in Kingfisher County, said J. Russell Porter, president and CEO.

The joint development agreement is with an unnamed, private global investment fund. The amount was not revealed, but the deal enables the company to drill and develop up to 60 operated wells in the Stack play in Kingfisher County. The Meramec and Osage formations under the company’s 109,000 net surface acres are “very blocky and contiguous,” in Porter’s words, which will allow for longer laterals.

“The DrillCo JV … is something we are excited to be executing; we’re already drilling our sixth well. It’s a good sign that capital is flowing to the play and is willing to take on a somewhat unconventional structure. It’s structured on a rate-of-return basis,” he said, with three tranches of 20 wells each. The first tranche involves 18 wells to the Meramec, and two to Osage.

“This [deal] allows us to accelerate drilling, which enables us to hold this acreage by production. Remember, each time we hold a spacing unit by drilling one Meramec well, we’re holding five other Meramec locations, four to eight Osage locations, four Oswego, four Woodford and two Hunton Lime. We’ve captured all that.”

Because the company is pursuing five opportunities across this acreage (Oswego, Meramec, Osage, Woodford Shale and the deepest formation, the Hunton Lime), its “G&G team refers to this as our ‘Cinco Stack.’ We think there will be a tremendous number of wells drilled in this, and it’s a very, very large resource base,” Porter said.

“We are the only true public pure play in the Stack now, and we think that will drive a lot of value for shareholders as we exploit these assets. We are actively drilling the Oswego, Meramec and Osage at this point.”

Gastar had actively drilled the Hunton in the past, but returns were not as good as in some of the other formations, Porter said. “To be honest, Wall Street doesn’t really care about that play as much,” so Gastar is refocusing on the other formations in the region, with the Meramec the main target at the moment.

Based on the current strip price and $4.5 million cost per well (trending down to less than $4 million recently), the Meramec yields as much as a 53% IRR, Porter said. Gastar has 357 net locations to drill in the Meramec, 111 in the Upper Hunton and 108 in the Lower Hunton.

Gastar has plenty of drilling potential throughout the Stack play, especially in the Meramec.

“Needless to say the economics here stack up against any of the other plays,” Porter said, citing a Wells Fargo research report indicating the Stack is the third most economic U.S. play behind the Permian Basin and some core Niobrara acreage. “We certainly don’t have the same valuations yet as the Permian Basin does, but we hope Wall Street wakes up to that and we see those valuations start moving in our direction as well.”

Gastar is trying to extend the play northeast into Garfield County. It just sold a noncore piece of its Stack position, primarily in northeast Canadian County, to a private third party to generate liquidity, for $71 million. The deal should give the company enough capital to support its plan for the rest of 2016 and 2017, Porter said in a written statement. “The northern half of this acreage is very prospective, but the southern half is very complex geologically with a lot of faulting,” he said.

Proppant intensity during stimulation is still going to be one of the most critical factors for success, and one with which Gastar is experimenting, he said.

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