Springer: New Shale In Town

In September, Continental Resources Inc. revealed details about its ongoing drilling campaign in the Springer Shale, one of its “stealth plays.” For nearly two years, it had kept this highly siliceous, organic-rich, porous, permeable and overpressured formation in the Scoop (South-Central Oklahoma Oil Province) portion of the Woodford play secret while delineating its underlying Woodford Shale acreage.

Continental CEO Harold Hamm has stated that the Springer has “distinguished itself as the most productive play in Oklahoma” with “shallow decline rates compared to other unconventional resource plays.”

Since the fourth quarter of 2012, activity has grown rapidly in the Scoop across three key metrics: acreage, rig count and production. Naturally, the Springer play is in its delineation phase as wells are drilled primarily to hold acreage by production. However, with a formation capable of producing 67% oil and 84% liquids at low decline rates that resemble the production of a reservoir rock as opposed to a source rock, the Springer is being tested immediately for optimization.

Continental is not the only company recognizing the Springer’s growing opportunities. Newfield Exploration Co. has chimed in with its first operated well in the Springer Shale and has a working interest in at least nine other Springer wells drilled to date. Marathon Oil has jumped on the Springer, too, having designated the Goddard and Boatwright formations within the Springer as exploration horizons that will compete for capital spending in the Anadarko Basin.

Company disclosures have revealed encouraging production volumes from the Springer Shale. But how does the Springer compare to other plays in the Anadarko Basin? Because the Springer has high liquids content, Stratas Advisors examined three of the oiliest Anadarko Basin plays: the Scoop Woodford, Stack Woodford and Cleveland—and found that, in the first 36 months of production, not all plays in this basin are created equal. (The name Stack derives from the basin’s stacked formation potential.) On a volumetric basis, the Scoop Woodford wells are the most productive, followed by the Springer and Stack Woodford. Trailing significantly behind is the Cleveland.

Yet, when it comes to economics, the Springer outshines the rest. Assuming a price deck of oil at $80/bbl, NGLs at $37.50/bbl and natural gas at $4/Mcf; and a 10% discount rate, the Springer features a pre-tax NPV of more than $10 million. Looking less than half as attractive is the Scoop Woodford at $4 million pre-tax. Ranging farther down the scale is the Stack Woodford, with the Cleveland teetering on the edge of profitability.

Allowing for variance of the price of oil, our analysis indicates that the breakeven price of oil necessary to clear the 10% hurdle rate in the Springer is a stout $43/bbl. Not far behind is the Scoop Woodford with a breakeven of $54, but the real distinction between these two plays arises out of their liquids content and well-cost differential. If a more valuable hydrocarbon mix can be extracted from a 1,000-foot-shallower depth in the Scoop, the Springer suddenly distinguishes itself as the low-hanging fruit.

While the price of WTI trends far below $80/bbl, questions about the economic viability of drilling in the Anadarko Basin will likely ring louder throughout the plains of Oklahoma. Indeed, Apache, one of the chief operators in the Cleveland, has already begun to redeploy rigs outside the basin. Based on internal breakeven calculations, the Woodford portion of the Stack play also appears vulnerable in this price environment. In any case, the Springer will not produce enough volume to dethrone the Woodford as the most prolific shale in the Anadarko Basin. But as margins draw thinner throughout the oil industry, the Springer Shale might easily be the last formation standing.

For more research and analysis, see stratasadvisors.com.