How Consolidated Are The Unconventional Plays?

Hart Energy's exclusive rig counts measure drilling intensity. Our counts exclude units classified as rigging up or rigging down, and also exclude rigs drilling injection wells, disposal wells or geothermal wells. The result is our most accurate assessment of rigs on location working on oil or gas programs as of the sample date. While our process results in a rig tally that is lower than the published numbers from the non-proprietary rig-tracking agencies, Hart Energy believes our product presents the most accurate picture of what is actually occurring in the field.

So how many operators does it take to drill up an unconventional play?

No, this isn't one of those light bulb jokes. Rather, it's an effort to look at how many operators it takes to account for half the rig count in an unconventional play.

It's a legitimate question. The unconventional plays are primarily the purview of the public independents -- no surprise there. The plays require a lot of capital to block up land by the hundreds of thousands of acres. It takes even more capital to delineate and optimize the play. And it takes a substantial long-term capital program to successfully develop resource plays.

Typically those companies are going to be public independents. That's one reason why any industry conference that involves publicly held oil and gas operators will find the subject matter focused almost entirely on unconventional oil and gas. With a steady stream of trade press and buy-side investors, it's little wonder that unconventional plays are the major headline in oil and gas to the exclusion of everything else when it comes to domestic exploration and production.

Regional privately held operators are present in the unconventional plays. Often they are early movers. But many lack the capital resources to overcome the barriers of steep technical challenges and a ferocious capital burn rate. That cash usually is consumed at the rate of $5 million per well, or more.

The level of consolidation in unconventional plays therefore points to one of the recurring issues in today's oil and gas business. Really, there are two industries. There is an industry comprised predominately of privately held oil and gas operators, each firm usually a collection of a savvy group of engineers, geologists, landmen or dealmakers who are good about taking a concept, blocking up acreage, proving the concept, then flipping the package to larger public firms.

This was the engine that drove oil and gas during the last 20 years. It's no secret that the large public independents would not be the size they are today had they not been able to mine the ideas and opportunities provided to them through smaller, privately held firms.

The other oil and gas industry is the one in the headlines. It's exciting. It’s dynamic, and it's all about unconventional resource plays. During the last half-decade the resource plays have siphoned off enormous volumes of capital, and that process has often left the privately held operator alone at the deal-making altar.

When a private firm sells a package in someplace like the Permian Basin, the prices are usually at a level that precludes an opportunity for the private firm to take the proceeds and reinvest the back into the region. Similarly, the ArkLaTex has been a cauldron of innovation among privately held independents. But many find themselves unable to acquire acreage since the nearby Haynesville has boosted lease prices. While many privately held firms are expert in conventional oil and gas, a neighboring unconventional play creates an enormous demand for rigs, capital, and resources -- and drives those prices well beyond the threshold of economic reason for the smaller firm.

And that gets back to the original question. Are the unconventional plays a playground for all operators, or do those plays exhibit heavy concentration among a handful of public independents?

The evidence points to consolidation. What follows are a few examples of how many operators it takes to account for half or more of rig count in select tight formation oil and gas plays.

Barnett Shale -- There are 17 operators active in the Barnett Shale at the end of August employing 63 rigs. However, four operators represent 70% of activity in the play, led by Chesapeake Energy and Devon Energy with 14 and 12 rigs turning to the right, respectively, followed by EOG Resources and ExxonMobil with nine rigs each. The verdict? A handful of operators dominate the Barnett.

Cana Woodford -- There are 13 operators active in the Cana that employ a combined 48-50 rigs turning to the right in any given sample date. But three operators account for 73% of rig count, including Devon (18 units), Continental Resources (11 units) and Cimarex (7 units). Eight operators -- and several are small privately held independents -- employ a single rig each. As in the Barnett, a handful of operators dominate current development efforts in the Cana Woodford.

Granite Wash -- There are 22 operators active in the Granite Wash employing 73 rigs as of Aug. 26. There are another eight operators who have employed rigs during the last 30 days. But five operators represent 54% of rig count with one operator, Chesapeake, employing 28% of rigs as the company ramps its efforts in the third quarter 2011. Devon, Plains Exploration & Production, Apache and Cordillera Energy each employ five rigs. But 12 operators employed two rigs or fewer at the end of August. Though not as concentrated as the Barnett or Cana Woodford, the Granite Wash still displays evidence that a handful of operators dominate this tight gas/liquids rich play.

Haynesville Shale -- Fourteen operators employed one or more rigs in the core Haynesville in northern Louisiana at the end of August. The play sported 64 rigs active on Aug. 26, though recent wet weather knocked those numbers down from an average of 73 units during the last six weeks. Three operators -- Chesapeake, EXCO and EnCana -- represent 55% of activity, though Chesapeake is down about eight units since early July while EXCO has gradually increased its rig count by three units to 14 during the last six weeks. Ten of the 14 operators in the core Haynesville employ two or fewer rigs. The verdict? The play is highly consolidated.

Piceance Basin -- Seven operators employed 30 rigs in aggregate in Colorado’s Piceance Basin at the end of August. But just two operators accounted for 21 rigs, or 70% of the basin's total. Williams Production (12 units) and EnCana Oil & Gas (9 units) are the dominant operators in the play, which includes notable names such as ExxonMobil, Occidental, Noble Energy, Bill Barrett Resources and PDC Energy.

So how many operators does it take to drill up an unconventional play? If the topic is consolidation, the answer is: not many.

Current Rig Count

Trends

Historical

Source: Hart Energy, Smith Bits (A Schlumberger Co.)

Contact the editor, Richard Mason, at rmason@hartenergy.com.