The Horizontal Cometh

In late April, a northern front pushing into South Florida brings a morning low of 54 degrees to the beachfront resort cities of Fort Myers and Naples, to the Everglades and to drillsites targeting the long-plied Sunniland Trend.

"The weather this week is what we wanted all winter," says Tom Jones. He and Christian Spilker, senior executive vice presidents for Collier Resources Co., are reviewing inquiries this morning about drilling some or all of the company's 800,000 acres of legacy mineral rights in Collier, Hendry and Lee counties.

While southern Florida is little known today as an oil-producing province, the limey marl-stone and mudstone of the Sunniland formation, which stretches from Fort Myers to Miami, has given up 120 million barrels of oil in the past 70 years. Production began with a Humble Oil & Refining Co. (now ExxonMobil Corp.) discovery well on Collier minerals near the old Sunniland railroad stop just south of Immokalee. While not appearing on Google maps today, Sunniland is at the intersection of State Road 29 and County Road 858, aka "Oil Well Road."

Many attempts to prove oil underneath Florida's forest and farmland surface had been tried, beginning in 1901. The state of Florida eventually offered a $50,000 bounty to the first operator that would find commercial oil here. In 1943, Exxon Corp.'s Sunniland No. 1 came in at 140 barrels a day. Owning up to its pledge, the state wrote the $50,000 check. Exxon added $10,000 and split the total in equal donations to the University of Florida and Florida State College, at the time, the state men's and women's universities.

About half of those 120 million barrels of oil has come from Collier mineral rights alone.

Today, the Sunniland still makes 2,400 barrels a day from 16 or 17 wells in the South Florida Basin. But a turnaround may be on the horizon, as BreitBurn Energy Partners LP, the only active driller in South Florida, has begun making horizontal wells. Also, great interest has developed among other operators in drilling the pristine Lower Sunniland found at 20,000 feet, which Jones and Spilker call "the rubble zone."

Several wells were drilled to Lower Sunni-land years ago to take a look at the rock—all had oil shows. One was completed, making 300,000 barrels in its run, with no water. "And, that was from just a vertical hole in that zone," Spilker says. "So it has all the characteristics of an interesting resource play. With today's technology, it's all the more reason to pursue it."

Private E&Ps’ assets featured in this article range from the Rockies to South Florida.

Naples, Florida-based Collier Resources Co., formed in 1942, is the entity that manages the mineral rights for what are, today, two Collier family companies: The Barron Collier Cos. and Collier Enterprises, which represent a friendly split of the family's interests in the 1970s. A general manager, Robert Duncan, ran Collier Resources until his recent retirement; since then, Jones, representing Barron Collier, and Spilker, representing Collier Enterprises, jointly run the business.

The family holdings include real estate, farms and one of the largest cattle ranches east of the Mississippi River—"a little bit of everything," Jones says—and all in South Florida, except for a few noncommercial properties elsewhere. The holdings are the legacy of Barron Gift Collier, a Memphis streetcar-advertising magnate who visited Fort Myers in the early 19th century. "He fell in love with the area," Spilker says.

From 1921 to 1923, Collier amassed 1.3 million acres of land in what was Lee and Hendry counties. Later, Collier County was carved out of Lee in a deal with the state in which Barron Collier would fund construction of Highway 41—the Tamiami Trail or "Tampa-Miami Trail"—through the Everglades, connecting the southwestern and southeastern coasts. Previously, they were only joined by boat, and the road resulted in new development of the western coast.

Palmettos surround Precision Drilling Corp.’s Rig No. 314 as it drills the horizontal Red Cattle 29-7HL oil well in West Felda Field in Hendry County, Florida, for BreitBurn Energy Partners LP.

Collier surface ownership today totals some 200,000 acres—net of having donated some 160,000 acres to create the Big Cypress National Preserve—but the mineral rights were always retained by the family. Barron Collier was certain oil would be found under his property. According to the Washington, D.C.-based American Oil & Gas Historical Society (AOGHS), the story is that before his death in 1939, he told his son, "I can smell it."

Until 1943, no one had drilled deep enough yet. The eventual Sunniland discovery was at 11,626 feet.

Spilker says, "We're grateful the founders of the company had the foresight to maintain the minerals. That was before oil was ever proven in the area."

Christian Spilker (left) and Tom Jones, senior vice presidents of Collier Resources Co., jointly manage the Collier families’ roughly 800,000 acres of mineral rights in South Florida over the long-plied Sunniland Trend, including under this display in Oil Well Park, near the site of the discovery well, Sunniland No. 1.

New drilling interest

Although Collier Resources has leased its mineral rights, which are primarily in Hendry and Collier counties and partly in Lee, it hasn't participated in the wells. But it is considering breaking with tradition to take a working interest, which poses greater reward opportunity but comes with the downside risk of paying its share of costs.

"We're looking to take a more active role going forward," Jones says. "Of course, a lot of that is spurred on by the price of oil and the long-term projections for the price of oil. We think we have a very underexplored and underdeveloped asset, and if we need to take more of a role with a working interest, then we may head in that direction."

Without identifying companies that have inquired about drilling the mineral rights, the vast majority of which are not currently leased, Jones and Spilker acknowledge that they are "top shelf" operators, and each is keen on the Lower Sunniland.

"The beauty of what we have is multiple oil-producing horizons down to 20,000 feet," Spilker says. "We have conventional Upper Sunniland and some layers even above that, and we have the Lower Sunniland—the rubble zone—which is much more of an unconventional liquids resource play. It is ubiquitous across a majority of the acreage we have."

Landman and prospect generator Brandt Temple's New Orleans-based Sunrise Exploration & Production Co. has put together some 135,000 net acres of mineral-rights leases around the Collier holdings. Temple's thoughts on the play were in the January issue of Oil and Gas Investor.

Spilker says that, in the article, "Brandt rightfully pointed to one of our wells, which is really the only well we have good data for that was completed in the rubble zone. That well pro- duced as a vertical hole almost 300,000 barrels of oil with really no water cut. It produced just oil and for a long time from a vertical hole in that zone.

"So it has all the characteristics of an interesting resource play. With today's technology, it's all the more reason to pursue it."

Spilker notes that the size of the rights-holding is large, giving an operator lots of room to run, and it's largely unexplored and undeveloped. Currently, only BreitBurn is actively drilling Collier minerals, which host three Sunniland fields—Bear Island, Raccoon Point and the original Sunniland, which has made more than 13 million barrels alone.

BreitBurn came to own its South Florida interest when, in 2007, it acquired Calumet Florida LLC, a holding of Microsoft Corp. co-founder Paul Allen's Vulcan Capital investment company. Collier Resources also has a partnership with Lake Ronel Oil Co. based in Tyler, Texas. But Lake Ronel is not currently drilling. "The majority of our minerals are unleased," Jones says, "and we are looking to change that."

Drilling commences on BreitBurn’s horizontal Upper Sunniland well, Oleum Corp. 34-4AH, in Collier County’s Raccoon Point Field. The field is incorporated into the Big Cypress National Preserve on the western edge of the Everglades.

The Cretaceous-age Sunniland Trend is com- prised of formations between two salt layers in a large reef structure that extends into the Gulf of Mexico and to the coast of Mexico. The majority of Upper Sunniland is at 11,600 feet. "So even that is deep," Spilker notes.

Jones adds, "The decline-curve characteristics of the Sunniland are interesting. Some of the wells have a very high initial production that holds for a year or two. Then, there is a steep decline and they level off and produce for a very long period of time. There was a well in the mid-1990s at Raccoon Point Field that had initial production of 3,300 barrels a day at about 11,300 feet. It produced at that rate for almost two years and it's still producing today."

The surface profile

For the most part, only BreitBurn is drilling South Florida today. And, it is a distinctive fit, as it is a master limited partnership that seeks low-decline production. The MLP's founding operations are in the Los Angeles Basin, including in Beverly Hills, so it is very experienced with drilling in a hyper-sensitive environment.

While the state of Florida is oil and gas friendly, industry perception may be that indigenous and non-native constituents aren't. Concern has been primarily for protecting Florida's beaches, however. For example, federal leases for drilling offshore the Florida Panhandle were rescinded in 2002. Subsequent federal lease sales off the coast have been announced and then withdrawn. Also, local and federal legislators have raised concerns about drilling offshore Cuba. And interest in the Everglades ecosystem has grown over the decades.

A life-size statue of Thomas Edison stands under the Banyan tree he planted at his winter home and botanical workshop in Fort Myers, Florida, some 86 years ago. The tree now covers more than an acre on the estate, which was donated to the city of Fort Myers in 1947. Edison and Henry Ford, who had an adjoining estate, invited Barron Collier to the area in the early 20th century.

However, the Sunniland play is all onshore, in lightly populated areas, and the sour crude lifted from the rock has scant associated gas, requiring downhole pumps to bring the liquid to the surface, thus an improbable chance of a spill. Moreover, the Colliers—with a nearly century-old reputation as stewards of the land—are known locally as being aligned with the community to protect the environment.

Says Spilker: "We represent families for whom the county is named, and they have the utmost respect for this area. Stewardship is core to our mission. So, we certainly take a hard look at all of our operations—not only oil and gas, but from real estate to agriculture—from a best-practices point of view. I think everyone understands the value oil brings to this area and we're happy to have the asset, but we also are caretakers of this area and the community is aware of that."

Several hundred thousand acres of Collier mineral rights also underlie Big Cypress National Preserve. The Collier family, along with native Americans and other interested parties, brought about creation of the preserve in 1974, with the Colliers contributing 160,000 acres.

In the first paragraph of that federal legislation, Jones notes, the right to pursue the underlying oil and gas is protected (as well as public hunting and recreation), which a national park would preclude. "Two of the Sunniland-producing fields are within the preserve today" Jones notes. Bear Island, discovered by Exxon, has been producing since 1972, and was incorporated into the preserve. Raccoon Point Field, discovered by Exxon in 1978, was established after the preserve was created.

Spilker adds, "It is interesting, the discussions we've been having over the last year with people in the industry: There's really a point of difference between federal leases and leasing private mineral rights within federal lands. You know in the Western states you have a lot of federal land and federal leases. Here in Florida, we own those mineral rights and those rights have been upheld since the creation of the preserve."

Other entities have mineral rights over Sunniland, although not as large as the Colliers'. "Those large landowners, our neighbors, don't have an oil and gas division, so we have a close relationship with them," Spilker says. "We help them with some of their oil and gas issues and we're all on the same page."

Smaller footprint

Horizontal production of southwestern Florida's oil and gas is particularly intriguing—for the many-fold bounty of resources it may give up compared with that of vertical wells, but also because more resources are produced from a smaller footprint.

Hal Chappelle, Alta Mesa Holdings LP president and chief executive, is interested in what horizontal technology may bring to Florida’s production potential.

"Given environmental sensitivity," Spilker says, "horizontal opens up all new possibilities in terms of reducing the surface impact in accessing the minerals."

Already, BreitBurn is proving greater commerciality of horizontal output from Upper Sunniland. "There's definitely been an uptick in production in the past six to 12 months. Some of their horizontals have done quite well."

BreitBurn had 2011 average daily production of 1,815 barrels of oil equivalent per day, mostly oil, from South Florida, or 8% of its companywide U.S. output. It estimates 9.9 million BOE proved on its leasehold, 100% proved developed, with a 15-year reserve life.

Jones says new interest in horizontal Lower Sunniland production poses the prospect of newly increased volumes from the Upper Sunniland as well. "I think we'll see interest in all layers."

Something may develop in the coming year. Jones says, "We're going to be more aggressive than we have in the past in trying to develop this resource. Let's see what's there. With the price of oil, now is the time to take a run at it."

With 800,000 acres of mostly contiguous mineral rights, "the ability to get in at this level is really unprecedented," Spilker adds, "without having to go through that door-to-door assembly that is the normal process. As you look across the country, there are very few of those large chunks of mineral rights out there."

A bonus to newcomer operators is that the Collier companies are well versed in the local permitting processes. "They don't have to come in and try to figure it out all for themselves. We can help them with the lay of the land."

Jones says, "We're confident it can all be done in a logical and environmentally sensitive fashion and it can potentially provide another opportunity for jobs and economic expansion in South Florida." The economy of the area depends largely on construction, tourism and agriculture. "There is a possibility of bringing a fourth leg onto that stool—oil exploration and production."

Would the state offer another bounty—say, for first commercial horizontal production from Lower Sunniland, maybe just as a historical reference? Spilker laughs, "You'd have to talk to the governor about that."

Spilker notes that some of the decline in production is simply a matter of the bigger oil companies moving out when oil was priced lower. Sunniland Trend production peaked in 1977. "We think this trend has proven itself in the past and, with the right player in the mix, it's going to be back where it was, especially with today's technologies."

Florida Panhandle

Tillandsia grow upon a reclaimed drilling-pad site in South Florida. The “air plant” grows from nutrients it harvests from the air rather than from soil.

Since that Sunniland discovery well, more than 600 million barrels of oil have been produced in Florida, peaking at some 45 million barrels in 1978 alone. In 2009, production had fallen to fewer than 2 million barrels. A state list of active operators totals seven.

But output may turn around—from South Florida and also from the only other oil-producing region in the state: the Panhandle, which hosts the giant Jay Field as well as Blackjack Creek Field.

"Florida is interesting," says Hal Chappelle, president and chief executive officer of Alta Mesa Holdings LP. The privately held, Houston-based E&P is also interested in what horizontal technology may add to Florida's potential, in particular, to its interest in Blackjack Creek.

"There are a couple of very large oil fields in the Panhandle of Florida. You're probably familiar with southern Florida; BreitBurn is in the Sunniland Trend there. Those are all pretty large fields, but where we are, north of Pensacola, the primary formation is the Smackover," Chappelle notes.

Jurassic-age Smackover is the oil-producing formation that has been long plied from southern Arkansas and northern Louisiana through Mississippi and Alabama to the Florida Panhandle. Its name is derived from a town in Arkansas near the discovery well.

Efforts to find commercial amounts of oil began in Florida near Pensacola in 1901, according to the AOGHS. But these wells were drilled to less than 2,000 feet. Twenty years later, an attempt was made to some 4,900 feet about 100 miles east of Pensacola. It had a show of gas at about 4,000 feet, but was a dry hole.

Its beaches are among the reasons advertising magnate Barron Collier fell in love with South Florida, where he amassed 1.3 million acres of land in 1921-23 after his first visit to the area.

Finally, in 1970, Exxon, suspecting the Smackover Trend extended farther east from southern Alabama, tried the formation near Pensacola at about 16,000 feet. Since then, some three-quarters of Florida's oil production has come from the Panhandle area.

That field, Jay Field, near Jay, Florida, is the largest producer in the state, peaking at more than 36 million barrels in 1979. At its time, it rivaled Prudhoe Bay in size. In 2010, it made some 900,000 barrels.

Blackjack Creek Field was discovered in 1972, again by Exxon, with the St. Regis 13-3 well. Field output reached more than 6 million barrels in 1980; in 2010, it made just more than 88,000 barrels.

"We're right next door to the much larger Jay oil field," Chappelle says. "Blackjack Creek had about 110 million barrels of oil in place and more than 57 million has been produced. We're operating a waterflood there today."

Is the Smackover a formation Alta Mesa might consider for horizontal production? "That's a great question. ExxonMobil, prior to divesting of Jay, drilled a couple of horizontal wells. They had some success, so we're evaluating that. We've done a lot of reservoir-performance simulation to understand it better.

"At this point, we're considering four infill wells there. We don't have those budgeted this year, but that's part of what we're considering at this moment."

Horizontal Texas, Marcellus

Existing horizontal-pay prospects are part of what keeps Alta Mesa busy instead. The privately held E&P was founded in 1987 by Mike Ellis, chairman and chief operating officer, after beginning his career with Amoco. Alta Mesa has recently begun filing with the SEC, as it has high-yield debt outstanding. Some of the proceeds from the $300-million issuance in 2010 were used to pay $50 million to private- equity provider Denham Capital Management LP, on its $150-million investment made in 2006.

The funding enabled Alta Mesa to acquire Meridian Resource Corp. in mid-2010, from which it gained a large Gulf Coast-focused, 3-D seismic database and acreage over Eagle Ford in South Texas, among other assets. Alta Mesa relicensed a large amount of the database.

"In the time since, we've put efforts into reprocessing the data and identifying the spectrum of opportunities that are exploration related but also development related for many years to come," says Chappelle, who joined Ellis at Alta Mesa in 2004 from other independent oil companies.

In South Texas, Meridian was targeting the Austin Chalk formation since 2007 and sold 75% of its position to Murphy Oil Corp. in 2009, creating a Murphy-operated area of mutual interest, primarily in Karnes County.

"Since then, we've participated in more than 40 wells there and 35 are on production now. Our stated program is 120 wells in four years, but there may be more than 200 wells, depending on decisions for downspacing," Chappelle says.

In the Marcellus shale-gas play, Alta Mesa operates a small leasehold in Taylor County, West Virginia. "We just finished drilling a 7,000-foot lateral there. We stayed in zone the whole way, and moved off location for $2.5 million."

Fracture-stimulating will wait, however. "We probably will later this year because the gas market—if you look at the forward curve—really incentivizes operators right now to wait. That's what the market is telling us by the price signal: Wait and do that sort of thing later."

Alta Mesa's position there is purposefully small. It's a bit of a science project, he adds. "We made a decision in 2008 that this is an area we believed would have great potential and we wanted to understand it. We wanted to get a toehold, if you will, in it and position ourselves with knowledge about both the resource and the service sector in the area.

"We thought then, and we still think now, that this could be an area that could be very prospective for a long time."

While gas prices are discouraging new drilling and selling gas properties isn't profitable at the current strip, "if there are opportunities in the future there, I think we will be well positioned from a knowledge and operational capability to act upon those."

Alta Mesa is also in another gassy window—the Amoruso and Hilltop fields in East Texas, where Encana Corp. is the main operator. The target there had been big-initial-production Deep Bossier gas, but what it and Encana are targeting lately is the liquids-rich Woodbine sands. It is drilling both verticals and horizontals in the play.

Simultaneous drilling and service/ completion are under way at BreitBurn’s Pad 5 horizontal program in Raccoon Point Field in the Big Cypress National Preserve. (Photo courtesy of BreitBurn.)

Within Alta Mesa's roughly $230-million, 2012 capex plan, which is 30% more than in 2011, the focus is oil. 2011 production was 41.7 billion cubic feet equivalent, up 35% from 2010. Liquids production in February was 33% and is projected to be more than 40% by yearend.

About $70 million will be spent in conventional formations in South Louisiana where it has 32,000 net acres, with some $50 million of that devoted to Weeks Island Field in Iberia Parish alone. And, it will spend an additional $50 million on pursuing Eagle Ford liquids.

The majority of its leasehold is held by production (HBP) currently. "That's a characteristic of our company. A great deal of what we have today is really just historically productive fields assembled by Mike Ellis during the past 25 years. We've been able to do a combination of 'explore and exploit' without a great deal of strain or stress in terms of drilling obligations that are time sensitive."

Alta Mesa plans to fund all of its drilling capex plans from cash flow this year, Chappelle adds. "Obviously, cash flow can be lumpy, so you draw funds from your revolver and you put it back." It has a bank facility with Wells Fargo.

Importantly, about 63 million cubic feet of its daily gas production is hedged at about $4.30 this year. About two thirds of its oil production is priced as Louisiana Light Sweet, which is like that of Brent, rather than the lower-priced WTI. In fact, its highest price realizations last fall were from oil made from Blackjack Creek Field.

Rig workers pull pipe while drilling BreitBurn’s horizontal Oleum Corp. 34-4AH in Collier County.

Conventional Oklahoma, Kansas

Alta Mesa continues to drill vertically, but only in Oklahoma, where it's held leases just west and north of Oklahoma City in the Sooner Trend, Kingfisher County, for about 20 years, growing it to some 50,000 gross acres today. There, the conventional Mississippi Lime produces liquids from vertical wells. But, new horizontal development that began in the northwestern corner of the state is making its way to centrally located Kingfisher County.

Alta Mesa is keeping an eye on results nearby. Among its highest-profile holdings—from the Eagle Ford, South Louisiana, East Texas and Oklahoma—its Mississippi Lime acreage might take the spotlight in the coming year, Chappelle says.

"We're very excited about the well activity going on there."

Also optimistic about liquids-rich, horizontal Mississippi Lime production is Dave Keyte, chairman and chief executive, and the team at Caerus Oil and Gas LLC. The Denver firm was formed in 2009 to acquire conventional upstream assets that are out of favor or held by distressed owners.

"Our first asset was on the Central Kansas Uplift," says Keyte, who co-founded the company with Matt Wurtzbacher, president and chief operating officer, and investor Chris Hunt, with private equity from Oaktree Capital Management and The Anschutz Corp. It bought into Kansas in early 2010 from the Teton Energy Corp. bankruptcy package, and it bought into Rockies gas at the end of 2010.

Some 90% of its more than 200,000 acres of leasehold is operated and most of it is HBP, "so we're not fighting the clock on any of it," Keyte says.

Mississippi Lime isn't prospective on the uplift itself, he adds, but it is present on the flanks, where some 15,000 acres of Caerus' holdings are prospective for the formation. "We're getting ready to develop it right now and, when we get drillbit ready, we'll determine whether we will farm it out. But we're certainly putting the science together on it and developing locations."

For now, the operator is producing primarily from the Lansing-Kansas City group and from the Arbuckle formation; about 10% of its Kansas production is from vertical Mississippi Lime wells. Of that, he says, "it's just not a great deal at this point."

About two thirds of Caerus' $15-million 2012 capex budget is dedicated to its Kansas oil portfolio. The balance will be spent in the Green River Basin on recompletions and refracs in the Frontier formation. While its private-equity funding commitment is not disclosed, Keyte notes that "we look at deal sizes of up to $300 million."

In the Rockies, where its production is gas and its wells are vertical, it isn't drilling new wells—which require gas prices of as much as $4.50 to be economic—and its current costs are already sunk. "We're still making money from these assets. We're hedged on the production from a gas-price perspective through 2014, so the gas prices aren't hurting us that much."

Caerus also has San Juan Basin acreage, which is a vertical play, and it has farmed out acreage in the Big Horn Basin for horizontal Mowry oil production and in New Mexico for horizontal Gallup oil.

Drilling is currently funded from a portion of cash flow and its bank facility with JPMorgan and Wells Fargo on a 50/50 basis. Production is some 600 barrels of liquids and about 10 million cubic feet of gas a day. About two thirds of its revenue is from liquids.

While Caerus is focused onshore the U.S. only for now, interesting to Keyte are the pristine horizontal prospects in Canada, with which he had the chance to become familiar while he and Wurtzbacher were both with Forest Oil Corp. "If you want a distressed asset, Canadian gas is the one. For as bad as it is for gas production in the U.S., it's probably twice as bad in Canada."

In the U.S., meanwhile, "there aren't a lot of conventional gas assets in the market right now, but I expect bank (credit-facility redetermination) actions this fall may help us.

"We have substantial capital behind us. We are a contrarian upstream play and highly interested In North American conventional natural gas. It's our favorite asset because it seems to be economically dislocated at this time."

More Lime

At top, Dave Keyte, Caerus Oil and Gas LLC chairman and chief executive, is working to develop the company’s horizontal Mississippi Lime potential in Kansas. Gary Mayfield, chief executive of Mt. Dora Energy LLC, is working the vertical Lime play on the Oklahoma side.

In Kansas, Keyte looks forward to further development of the Mississippi Lime play in the coming year. "That is a formation they're just beginning to scratch the surface of, so there is a lot of excitement about it and hopefully it's going to turn into the real deal."

It has been a surprise, he adds. "We knew it existed because we had production from it but the application of horizontal drilling, we did not anticipate. We certainly didn't anticipate the land boom that came."

Gary Mayfield is watching the horizontal Mississippi Lime play come to his Norman, Oklahoma-based Mt. Dora Energy LLC as well. Mayfield, chief executive officer, and partner Kelly Kirkland formed the Central Oklahoma-focused E&P in 2006 after years of working area oil fields for various producers, ranging from Phillips Petroleum Co. to Noble Energy Inc. The pair met at Noble, set off to start their own E&P and brought in $35 million of SW Capital Partners funding in May 2008.

Mt. Dora has an oil-producing waterflood in Stephens County in southern Oklahoma that, at press time, was put up for sale. In its other operations area, in northern Oklahoma, Mississippi Lime underlies it. "We've been watching it come our way, working from western Oklahoma to the east. It is a pretty exciting play to be around," Mayfield says.

For now, it is primarily pursuing stacked pay vertically in Pawnee County. It also has acreage in Kay and Noble counties, which, like Pawnee, are all east of the Nemaha Uplift where the Lime produces, percentage-wise, more oil than gas, compared with the output from west of the Nemaha.

"We originally went to Pawnee County primarily for the Red Fork formation. But we drilled our wells a little deeper to test other horizons down to the Wilcox, which is Ordovician in age, at about 3,600 feet." Mt. Dora also produces from the Simpson dolomite and Woodford shale as well as Red Fork and a couple other Pennsylvanian sands, all vertically, as well as from Mississippi Lime. "We produce from the Lime in every vertical well we've drilled."

The Pawnee County area is one among a few in Oklahoma that he has wanted to drill for himself for most of his career. "I'd always kept the Red Fork in the back of my mind." In 2006, there was scant interest in acreage in the county. "It was very quiet—not much activity for probably 20 or 30 years—so we were able to pick up leases on fairly reasonable terms and were able to choose what we wanted.

"We had two producing wells when we went up there and we've drilled 27 new wells."

As it saw the horizontal Mississippi Lime play was likely to spread east across the state, Mt. Dora picked up more acreage over the limestone, but all of it is also prospective for pay from Red Fork. "This was so we would have multiple pay for developing later, and a bailout in case the Mississippi play didn't work out."

Its leasehold over the Lime now totals 45,000 net acres. Early on in its acreage-gathering program, lease terms were five years; more recently, they're three years with options for two-year extensions. The company is no longer actively leasing. "Most of it is leased up around us now. There isn't any room to expand."

Its 2012 capex plans are for a minimum of $6 million and possibly as much as $10 million, fairly evenly distributed between its northern Oklahoma portfolio—where the vertical wells that commingle production from three to four zones cost between $640,000 and $750,000 each—and the waterflood property in the south.

Production from the latter is all oil and the rate of return at the current oil price is more than 100%. From the north, Mt. Dora's ROR is some 85% as it is netting some 165 barrels of oil and 1.4 million cubic feet of rich gas for which its shipper pays 1.5 times the price of dry gas. "If we have $2 gas, we get paid about $3 for it. It helps out a lot: $3 isn't great, but it's better than $2 for sure."

Besides its SW Capital Partners funding, it has a credit facility with Bank of Oklahoma. Otherwise, operations are funded from cash flow.

As for drilling the Mississippi Lime horizontally, Mt. Dora is sitting tight, Mayfield says. "Quite a few operators have drilled some wells around us and may drill more this year. What we're contemplating right now is an exit strategy."

Conventional Permian

Stanolind Oil and Gas LP vice president Marshall Eves says the company is sticking to its vertical roots in the Permian Basin north and west of Midland these days.

In the Permian Basin, Stanolind Oil and Gas LP is watching horizontal plays come to it. Formed in 2009, Midland-based Stanolind is Randy Stevens' third E&P start-up with Natural Gas Partners private-equity backing. The first, Permian Resources Holdings Inc., was sold to Chesapeake Energy Corp. in 2004; the second, Stanolind Oil and Gas Corp., was sold to Eagle Rock Energy Partners LP in 2008.

"New technology has opened up potential in horizons that people thought would never produce commercially," says Marshall Eves, vice president, who joined the newest Stanolind from H&M Resources LLC. "There are so many different zones out here that are tight, but horizontal drilling and frac techniques have really changed the outlook."

Horizontal-well and multistage frac applications proven in the Fort Worth Basin in the 1990s may have been slow to reach West Texas and southeastern New Mexico because so much of the other stacked pay in the Permian is economic with just vertical wells, he estimates.

"When you're getting into a basin with stacked pay, it's hard to just focus on one and go horizontal in it. There is pay up and down the hole, so you're giving up something by just going horizontal in one portion."

Most of Stanolind's acreage is north of Midland, in Terry, Garza, Gaines and Hockley counties, Texas, and west of Midland in Eddy County, New Mexico. Neighbors have begun drilling the Yeso and Abo horizontally. Stanolind is waiting to see how these work out.

Flared gas comes out of a heat treater in the Big Cypress National Preserve, a 2,400-square-mile swamp. The treaters are painted green to blend in with the environment.

"If you start drilling horizontally, you need to have a program to get your costs down and know the right approach to take. They're more expensive than just drilling a vertical. We don't want to be the first one out there, jumping into it, before we fully understand it and are confident we can make a good return."

Vertically, Stanolind is drilling Abo and some San Andres, which give up oil exclusively, and Yeso, which gives up oil and gas, but oil pay drives the drilling program. It has a few wells that primarily make gas that it came to own as part of oil-package acquisitions. Eves says of these, "They're skinny but they still work."

All of its acreage is HBP, so "we develop the acreage at a pace within cash flow." This year, it plans between 10 and 15 gross wells, 80% operated, costing between $500,000 and $1.1 million each with the deepest at 8,800 feet. Operations are funded from cash flow and a revolver with Wells Fargo.

"We try, like everybody else, to run a tight ship and keep our lifting costs as low as we can. We tend to take low-risk drilling opportunities, using the classic Permian Basin techniques people have been using for years."

The start-up's exit horizon could be influenced by horizontal development around it, though. "We don't have a definitive exit plan. We're just developing our assets, but horizontal drilling could definitely change the game./p>