Chaparral Energy Inc., with roughly $130 million in 2017 capex already committed to the Stack play in Oklahoma, added up to $100 million in funding Sept. 25 through a DrillCo with a Bayou City Energy subsidiary—nearly doubling its budget in the play.

The agreement partners Chaparral, based in Oklahoma City, with Bayou City’s BCE Roadrunner LLC to fund 100% of the drilling, completion and equipping costs in 30 Stack wells. The agreement is subject to average well cost caps in what Chaparral described as a first tranche of wells with future tranches possible.

The wells will target the Osage, Meramec and Woodford formations in Canadian and Garfield counties, Okla.

While development on the wells began earlier in September—and will continue through 2018—the joint venture (JV) gives Chaparral wide latitude on its development plans with its own capital. The JV allows Chaparral the discretion to redirect drilling capital toward acreage it acquires as well as other scenarios.

Bayou City’s capital will take 85% of Chaparral’s working interest in each well drilled through the JV. As the DrillCo reaches an internal rate of return of 14%, Bayou City’s working interests fall to 25%. The interests exchanged through the DrillCo cover the wellbore and don’t “otherwise burden Chaparral’s acreage position or development units,” the company said.

Chaparral said at Hart Energy’s recent DUG Midcontinent conference in Oklahoma City that it plans to run two rigs in 2017 and drill 26 Stack wells. The company holds about 110,000 acres in the play.

About 72% of the company’s capex—roughly $130 million–is devoted to the Stack including:

  • 50% in Kingfisher and the Merge play;
  • 33% in nonoperated assets; and
  • 17% in Garfield.

The company’s Stack position produced 9,100 barrels of oil equivalent in second-quarter 2017 from operated 65 wells.

At the DUG conference, Chaparral said it was pursuing opportunities to expand its Stack position and is moving toward becoming a pure-play company. The company is continuing to pursue strategic alternatives, including selling its EOR assets in Texas and Oklahoma and said in April it hired CIBC Griffis & Small to market the assets.

Chaparral CEO Earl Reynolds said the partnership with Bayou City reflects the value of the company’s Stack development.

“Their flexible E&P investment platform and ability to execute on unique, operator-friendly transaction structures will allow us to accelerate our Stack development plans in both Canadian and Garfield counties while maintaining our low-cost structure and corporate balance sheet,” Reynolds said in a news release.

In addition to financially backing management teams, Bayou City partners through “off-balance sheet” drilling partnerships to develop de-risked locations. The company eschews taking working interest in acreage or drilling units to avoid burdening future locations in a company’s development plan.

Bayou City, through its funds and co-investment, has committed or invested more than $700 million to Stack E&P management teams and drilling partnerships.

William McMullen, Bayou City founding partner, said Reynolds and Chaparral have demonstrated a track record of being a “consistent low-cost operator while still being able to achieve high production rates and strong EURs.”

“We expect the development program to deliver favorable economic returns even in today’s challenging commodity price environment,” McMullen said.

Willkie Farr & Gallagher LLP was Bayou City Energy’s legal adviser for the transaction. Thompson & Knight LLP was legal adviser for Chaparral.

Darren Barbee can be reached at dbarbee@hartenergy.com.

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