[Editor's note: A version of this story appears in the January 2019 edition of Oil and Gas Investor. Subscribe to the magazine here.]

If we track the life cycle of the shale plays as they unfold, what do they portend for U.S. production and the companies, investors and export markets that have come to rely on the shale story? Land rush, production rise, mature to sale, recycle and renew.

For an example, look to the trajectory of the Fayetteville in Arkansas, a dry-gas play that’s been in the news lately: Its discoverer and long-dominant player, Southwestern Energy Co. (NYSE: SWN), is exiting its entire upstream and midstream position there. For $1.865 billion cash and another $438 million of assumed debt, the buyer is Flywheel Energy LLC. The latter began as Valorem Energy LLC in early 2017 with backing from the Kayne Anderson Private Energy Income Fund. In August 2018, Kayne committed a second time to the management team with $700 million of equity in the form of Flywheel, based in Oklahoma City.

Fayetteville production peaked in 2014 at 950 billion cubic feet (Bcf) a year—roughly 2.6 Bcf a day. Four years later, Flywheel is taking over Southwestern’s 4,033 producing wells on more than 915,000 net acres and production that in 2017 totaled about 716 million cubic feet a day net.

This slowdown is a natural progression showing the shale’s decline curve absent better completion designs and enough capex—not to mention the effects of low gas prices amid a surfeit of U.S. supply.

At press time, the U.S. was approaching 84 Bcf/d of gas production. But still, although this Fayetteville sale makes all the sense in the world for Southwestern, it seems like the end of an era somehow.

I recall when former CEO Harold Korell visited the Houston offices of Oil and Gas Investor to introduce himself and his new direction. One of his major goals at that time was to sell the company’s local distribution company in favor of becoming a pure E&P. In 2003, it first leased acreage in the Fayetteville for $11 million, and, in 2004, he unveiled the shale.

Over time, the play grew like a weed; quarter after quarter, Southwestern delivered more production and became a Wall Street darling. No one seemed to question the economics at that time. Those was heady times. I ran into Korell at an investment event once and, as he rushed by, he said, “New York is on fire.”

By 2011, some 3,689 Fayetteville wells had been drilled, mostly by Southwestern, which perfected the integrated model of operating rigs, frack crews, supplies and logistics.

When the University of Texas’ Bureau of Economic Geology studied the play in 2014, it concluded there was 80 trillion cubic feet (Tcf) of original gas in place, with 38 Tcf technically recoverable, and full-field development of 18.2 Tcf as a mean recoverable amount by 2050.

Its base case, using an assumption of $4 gas, indicated 6,400 new wells could be drilled through 2030. It postulated that production would plateau between 2012 and 2015 (it did so in 2014), then begin a long slow decline as the annual well count fell and development moved from top-tier locations to the lesser-quality ones.

At one time, 15 operators worked the play, but nearly 100% of the production was owned by Southwestern, BHP Billiton Ltd. (NYSE: BHP) and XTO Energy Inc. The rig count rose to 30 in 2011, but, once the gas price started to decline below $3 in 2012, the gold rush was fading.

Southwestern had to pivot. Like most other E&Ps, it went searching for a higher-margin, wet-gas play—or an entrée to crude oil. It migrated to the Marcellus and Utica in 2014, buying Chesapeake Energy Corp.’s (NYSE: CHK) assets there for $5.4 billion.

At one time the vast majority of Southwestern’s production was from the Fayetteville, but, by second-quarter 2015, it was less than half as the company’s Marcellus production rose. Meanwhile, the Fayetteville rig count had plummeted to only four rigs by October 2015.

I was fortunate to have visited the Fayetteville in its heyday and I came away impressed with the way Southwestern ran the whole operation with such precision. Huge whiteboards hanging in one of its field offices in northwestern Arkansas tracked the delivery of drilling rigs, trucks, equipment and mud to various locations as the play unfolded, presaging the full-field development efficiencies and logistics we see so often today, more than a decade into the transformational shale era.

Most recently, Southwestern’s investor presentation outlined finding and development costs of $1.40/Mcf in the play—for a $2.7 million well, significantly below the costs posted five years earlier.

Now, it is up to Flywheel to carry on.

Mark your calendars for some upcoming Hart Energy events. Join us Feb. 12 in Houston for our annual Women in Energy awards luncheon, when we recognize 25 influential women in the energy industry. And, come to Shreveport Feb. 19 and 20 for DUG Haynesville, where we’ll hear an update from operators on what’s ahead for this new-again shale play.

Leslie Haines can be reached at lhaines@hartenergy.com.

Comments