Over the past four months, operators have become increasingly discerning of asset quality, focusing drilling activity on their highest-returning assets. The result has been a major retrenchment of 2015 capex budgets across the industry as companies attempt to align spending with shrinking cash flows. While the “big three” U.S. oil resource plays have experienced a significant reduction in horizontal rig counts as a result of this—the Williston Basin is down 34%, the Permian Basin, 27%, and the Eagle Ford, 24%—one region has held its own: the Scoop/Stack of central Oklahoma.

Breakevens support activity

The Scoop’s main target is the Woodford Shale, a 200- to 400-foot-thick, highly siliceous unconventional interval that generally exhibits thickening from the north to the south. The predictability of reservoir performance across the oil/condensate/gas windows coupled with low breakeven costs supports the flight to quality this region has seen.

The Woodford Shale represents a premier source rock with hydrocarbon diversity across its various phase windows. EURs in the condensate window approach 1,800 Mboe (52% liquids) with breakeven oil prices below $30/bbl, while EURs in the oil window approach 690 Mboe (80% liquids) with breakeven oil prices at $35/bbl (assuming $3 flat gas prices and 35% of WTI for NGLs).

These compelling breakeven costs will continue to drive organic growth from those entrenched in the play and spark interest from outside buyers looking to acquire U.S. shale.

Midland Basin analogy

In 2013, operators successfully delineated two horizontal benches in the Midland Basin—the Wolfcamp A and B. Fast forward 12 months and, with the addition of the Lower Spraberry Shale, the Wolfcamp C and the Wolfcamp D/Cline, at least five benches were in development mode. The serendipitous nature of the Midland Basin provides robust horizontal drilling inventories, a primary reason why industry valued undeveloped acreage in excess of $40,000/acre during 2014.

In that same vein, the Scoop/Stack had two horizontal benches delineated in 2014: the Meramec and Woodford. Moving into 2015, the Scoop/Stack is expected to have additional target zones delineated, including the Springer, Hunton, Bromide and, potentially, the Sycamore and Viola. The Scoop/Stack is about 18 months behind the Midland in horizontal development maturity, but shows similar inventory potential and returns, leading to increased valuation expectations for undeveloped acreage.

Coveted assets

The A&D market has a tendency to freeze during periods of volatile commodity prices. With the recent shock to oil prices (a 45% precipitous decline from October 2014 to February 2015), an increased bid-ask spread has been created between buyers and sellers, leading to a major reduction in A&D activity thus far in 2015.

This is significant when compared with historical averages, because $10 billion to $15 billion worth of U.S. onshore assets are typically traded on the A&D market quarterly (vs. some $900 million during first-quarter 2015). Once oil prices reach a new norm and maintain stability for two to three months, asset supply will catch up with abundant buyer demand for high-quality assets, which is aggressively looking to deploy capital.

As the market thaws, look for Scoop/Stack positions to garner significant buyer interest and compelling valuations, akin to the Midland Basin in 2014. Additionally, a scarcity premium exists within the Scoop/Stack, as a majority of the acreage is held by a select few large independents (Continental Resources, Marathon Oil, Newfield Exploration and Devon Energy). A new entrant would likely need to aggregate smaller, private operators to gain a meaningful position in the play.

The Scoop/Stack seems set for its breakout year in 2015 with increased interest from buyers and further stacked-pay delineation from incumbent players.

—Nick Woodruff, Patrick Atwood, RBC Richardson Barr, 713-585-3342, Nick.Woodruff@rbc.com

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