In the Arkoma Basin, the development of the Woodford and Fayetteville shales has made this part of the Mid-Continent region one of the hottest unconventional play areas in the US. Located just to the north of the Ouachita Mountains frontal belt, the Arkoma Basin stretches 300-plus miles across two states and includes the Fayetteville Shale play in central and western Arkansas and the Woodford Shale play in southeastern Oklahoma.

The Arkoma Basin is one of several foreland basins formed during the late Paleozoic Ouachita orogeny, which includes the Fort Worth and Black Warrior basins. Organic-rich shales, such as the Woodford, Fayetteville, and Barnett, were deposited on a shelf or in a basin area marginal to the Ouachita Front.

Fayetteville Shale

Production from the Arkoma Basin Fayetteville Shale occurs in Cleburne, Conway, Faulkner, Pope, White, and Van Buren counties in northwest and north central Arkansas.

The modern play began in 2002 and 2003 when Southwestern Energy Co. of Houston became interested in developing the shale. Today, expanding infrastructure combined with improved drilling techniques and falling costs have improved economics in the area. More than 800 wells have been drilled since the beginning of 2006, and current production has topped 800 MMcfe/d.

When Southwestern Energy reported its full-year 2008 results, it revealed that in 2008, it spud 604 wells in this play. By Feb. 15, 2009, its gross operated production was 750 MMcf/d.

Its average initial potential (IP) per well was 2.7 million a day, and its finding costs were about US $1.21/Mcf.

Although there is strong demand for core Fay-etteville acreage, the challenge is that the play is dominated by a small number of companies that entered the area early on, when leases could be had at a relatively low price per acre. Southwestern, Chesapeake Energy, Petrohawk Energy, XTO Energy, and now BP, through its joint venture with
Chesapeake, account for a majority of the play’s production and undeveloped leasehold. Southwestern, with approximately 860,000 acres in the trend, has drilled on less than half of its Fayetteville position.

Transaction activity in the Fayetteville has been dominated by a few consolidators, with Petrohawk and XTO leading the way.

In June 2007, Petrohawk acquired 32,500 net acres, mostly in Van Buren County, Ark., from an undisclosed seller. Petrohawk followed that acquisition less than six months later with an acquisition of producing properties from a number of parties, including Contango Oil & Gas Co. and Alta Resources, for $343 million, bringing Petrohawk’s total net acreage position in the Fayetteville to approximately 125,000 acres.

According to research firm IHS Herold Inc., this transaction marked the first such deal that provided an implied valuation benchmark for producing reserves in the Fayetteville Shale, at $3.15 per Mcfe, an implied 3P (possible reserves) value of $0.69 per Mcfe, and an implied production value of $17,182 per daily flowing Mcfe.

Not done with its Fayetteville consolidation efforts, Petrohawk made another acquisition in January 2008, paying $231 million for an additional 18,500 acres of mostly undeveloped leasehold in Van Buren and Cleburne counties.

XTO Energy has also been a significant Fayette-ville buyer, spending more than $3 billion on multiple transactions during the first seven months of 2008. The first of these acquisitions involved Contango’s remaining 20,000 core acres in the Fayetteville, including the interests owned by Contango’s partners, for which XTO paid $236 million in January 2008. One month later, XTO announced that it had entered into agreements with as many as 25 sellers to acquire properties in several onshore areas for an aggregate purchase price of $1 billion, including undeveloped acreage in the Fayetteville, Woodford, and Barnett shale plays, which XTO valued at $470 million.

In April 2008, XTO purchased producing properties, leasehold, and gathering systems in the play from Southwestern Energy for approximately $520 million, giving XTO more than 300,000 net acres in the Fayetteville Shale trend. According to Herold, the deal implied a proved reserve metric of $2.46 per Mcfe, an implied 3P reserve metric of $0.52 per Mcfe, and an implied daily production metric of $37,486 per Mcfe.

This deal also implied a metric of more than $9,000 per acre. According to the press release, XTO expected the acreage acquired to hold resource potential in excess of 1.0 Tcfe.

In July 2008, XTO announced another multiple-party, multiple-basin transaction involving a significant chunk of undeveloped Fayetteville acreage for an aggregate transaction value of $1.3 billion. According to its February 2009 investor presentation, XTO’s daily Fayetteville output is now 30 MMcfe, and it has interests in 380,000 net undeveloped acres in the play.

XTO plans to drill as many as 125 Fayetteville wells in 2009.

In the latter half of 2008, Chesapeake began its monetization efforts involving all its major shale holdings. BP announced its $1.75 billion acquisition of Chesapeake’s Woodford shale assets in July, and entered the Fayetteville just two months later through another joint venture agreement with Chesapeake. With the transaction, BP acquired a 25% interest in Chesapeake’s approximate 540,000 net acres in the play.

The agreement provided that BP would pay $1.1 billion in cash upfront and up to an additional $800 million, by funding 100% of Chesapeake’s 75% share of drilling and completion costs in the trend through 2009.

The deal also provided that BP would have the right to participate with Chesapeake on the same 75/25 basis for any additional leasehold in the Fayette-ville. According to Herold, the transaction implied a valuation of over $14,000 per net acre, setting a new benchmark for other Fayetteville leaseholders.

Woodford Shale deals

Activity in the Arkoma Woodford Shale trend occurs primarily in Pittsburgh, Hughes, McIntosh, and Coal counties in southeastern Oklahoma. Since 2003, Newfield Exploration Co. has been touting the Woodford’s potential (and a few years ago even hosted a financial analyst and shareholder tour, including a classroom session from its Tulsa offices). The field trip educated attendees on drilling operations and outlined the play’s potential.

Today, Newfield has 165,000 net acres in the play (of which at least 85% is held by production), operates almost a third of the active rigs, operates more than a third of the horizontal wells, and produces roughly a third of the play’s total production of over 400 MMcfe/d. Other significant players include XTO, Antero Resources, Devon Energy Corp., PetroQuest, St. Mary Land & Exploration Co., Continental Resources Inc., and now BP.

Despite the fact that Newfield and others have significant positions in the play and that most of the prime acreage has already been leased, a few companies have been able to enter or expand their positions here through acquisitions. In addition to XTO’s $1 billion transaction in February 2008 involving multiple parties and multiple shales, including the Woodford, notable transactions include the sales by Chesapeake and Linn Energy LLC described below.

BP made headlines in July 2008 when it acquired all of Chesapeake’s Woodford interests for $1.75 billion. The assets covered 90,000 net leasehold acres and had estimated production of 50 MMcfe/d. According to Chesapeake’s comments prior to the transaction, the properties contain over 2.0 Tcfe of reserve potential. As such, per Herold, this transaction implied a resource metric of $0.88 per Mcfe — and at the time it set a new valuation bar for the Woodford, although the subsequent plunge in commodity prices and the overall economy is likely to have a material impact on the metrics paid in future Woodford transactions.

In October 2008, as commodity prices continued to fall and deals were being cancelled throughout the industry, Linn Energy was able to find or hold the buyer for its Woodford deep rights to the tune of $202 million. Linn retained the shallow portion of its acreage in Oklahoma.

Future transaction activity

For the foreseeable future, the appetite for shale assets will be strong. Newcomer shale plays such as the Haynesville in Louisiana and Marcellus in the Appalachian Basin will likely continue to attract the broadest interest, and the Barnett in north Texas will continue to be considered the granddaddy of the shales – and a great investment if you can get access to the right address. But the Arkoma Woodford and Fayetteville shales will certainly attract substantial investment dollars.

In all probability, these dollars will come from new entrants. International E&P players are strategically looking for exposure to the US shales and want to put big dollars to work. StatoilHydro’s $3.4 billion investment in Chesapeake’s Marcellus acreage is an example of an international new entrant in a major US shale play.

The shale plays may be akin to the deepwater Gulf of Mexico, where in both cases the resource is massive and so is the capital required to develop it. Companies will thus follow the deepwater Gulf of Mexico trend in the shales by seeking joint-venture partners instead of trying to go at it alone, thereby spreading capital and risk.

The Arkoma Basin shales will therefore compete with the industry’s mega-investment opportunities not just in the US, but throughout the world.

Comments