The Next Big Thing

’Tis the season when travel publications publish lists of top-ranked warm-climate destinations as an off-season antidote to winter’s icy chill.

It may be time to do the same in oil and gas. With the shale-play treadmill slowing, at least until natural gas prices recover, industry conversation has turned to the “next big thing” that will attract enterprising oil and gas companies seeking a destination vacation that offers multiple opportunities.

Two destination markets offer potential over the next half-decade, with a third market in the mix if a company has a timeline of a decade or so.

All three destination hot spots have two things in common. The first is a long history of hydrocarbon production—often spanning multiple decades. The second is a thick stratigraphic column featuring multiple stacked formation targets. In other words, the places operators want to be over the next five to 10 years have the same allure as vacation destinations: good stratigraphic scenery and a soul-refreshing climate.

Furthermore, each prospective market is accessible to the full spectrum of oil and gas companies from small to large, unlike exclusive resorts such as deep water, where size and capital requirements create a significant barrier to entry for all but a handful of vacationing mega-firms.

For those with a half-decade horizon, the two destinations of choice involve stacked tight-formation plays in the Permian and Anadarko basins, which offer their own version of hydrocarbon sun, sand and sea. Better yet, the tight-formation development cycle is still in the early stages of a multi-year run, so these new vacation hotspots are not yet overwhelmed with the hoi polloi.

The Permian remains the top spot in the sun, thanks to three sub-basins that feature diverse opportunities. Think of the Permian as home to the Magnificent Seven of tight-formation oil and gas, including the Wolf-camp shale, Bone Spring sands, Delaware sands, Avalon shale and Pennsylvanian-era targets like the Cline shale, or even older geologic targets such as the Mississippi Lime.

Unlike some headline shales, which feature two or three hydrocarbon-bearing formations, the Permian is a stratigraphically stacked cornucopia of tight-formation possibility. Like most exotic off-season destination vacations, lease terms are reasonable, and late-season vacationers can gain access via acquisitions or joint ventures, the oil and gas version of a time-share.

Oklahoma’s western Anadarko Basin is a mirror image of the Permian, featuring multiple sub-regional, stacked tight-formation plays ranging from oil-weighted Cleveland/Tonkawa sands in the Texas and Oklahoma panhandles, down through the Marmaton and the multilayered Granite Wash in western Oklahoma and the Texas Panhandle.

To the east, some operators are rapidly de-risking Mississippi Lime locations in a multiyear effort while others extend the Woodford shale play south and east to the Red River. This Woodford extension produces greater volumes of condensate and oil than the natural gas liquids production in the Cana Woodford west of Oklahoma City.

If an oil and gas company likes a cosmopolitan geologic environment with some sophisticated nightlife in the form of pulsating unconventional technology, the Permian and Anadarko basins are at the top of the list for corporate rejuvenation over the next half-decade.

But if a company’s strategic-planning horizon tends towards the long view—say a decade or more into the future—it should include exposure to the gas-dominated Appalachian Basin. Like the Permian and Anadarko basins, Appalachia offers a thick geologic column of multiple tight-formation targets, though most tend toward the dry-gas side of the spectrum.

While that may have all the appeal of a low-cost blue-collar Caribbean cruise in today’s vacation environment, gas prices won’t stay low forever. Even a slight pricing improvement expands Appalachian Basin economics. Long-term attractions include the likelihood that the industry will rebuild a regional petrochemical complex, ready access to commercial markets where natural gas will provide U.S. manufacturers a global competitive edge, and the possibility of natural gas exports via liquefied natural gas.

And if you like long horizons, the Appalachian Basin should be on your short list. Despite the presence of the majors, and of several large, deep-pocketed independents, Appalachia is still a popular vacation spot for private independents and mid-caps, which provides a means to enter the play.