OKLAHOMA CITY—One small, private independent has staked an outsized position in the prolific Oklahoma Stack Play, and it has turned to a DrillCo joint venture (JV) with a private-equity provider to fund a portion of its drilling.

Hal Chappelle, president and CEO of Alta Mesa Holdings LP, called the Stack a top North American play at Hart Energy’s recent DUG Midcontinent Conference & Exhibition. Essentially, the Stack Play is a juxtaposition of the Devonian Woodford Shale and several Mississippian unconventional reservoirs. These include the Meramec, a silty, carbonaceous shale, and the Osage, a porous carbonate.

Currently, the Stack Play is expanding north and west from its established area in Oklahoma’s Major, Kingfisher, Blane, Canadian and Dewey counties. Stratigraphically, the Stack is expanding across the entire Mississippian section and upward into such Pennsylvanian reservoirs as the Oswego Lime.

Alta Mesa’s acreage position is concentrated in the updip oil window of the Stack Play, primarily in eastern Kingfisher County. To date, the company has drilled 116 horizontal Stack wells, mainly in the Osage Lime. It is also testing Meramec and Oswego with horizontal wells, and it plans a Manning horizontal test in the fourth quarter. The private operator now produces about 13,600 barrels of oil equivalent per day (boe/d) net from Stack reservoirs.

The company is funding its Stack drilling from both cash flow and from a DrillCo JV with private-equity group Bayou City Energy Partners. “We were able to enter into an agreement in January of this year,” Chappelle said. “We’ve drilled 33 wells out of a 60-well defined package consisting of three 20-well tranches.”

The deal added about $100 million of additional drilling funds during a key time for the company. The money allows Alta Mesa to maintain and develop its leasehold, grow its reserves and continue to define the resource.

The DrillCo partner funds 100% of the drilling and completions cost, capped at an average of $3.2 million per well. For that, DrillCo initially receives an 80% working interest in the wellbore. There’s a sliding scale for the DrillCo working interest, which gets reduced as internal rates of return (IRRs) increase. Specific wells are pre-agreed for each tranche.

The infusion of capital has allowed Alta Mesa to continue climbing the learning curve in the Stack Play. Chappelle said 3-D seismic surveys are a key tool for the company. It is currently completing a very high-fold, high-frequency survey that it will use for well planning.

Private operator Alta Mesa Holdings is focused on continuously improving its Stack well performance, driving down well costs while enhancing completions. Source: Alta Mesa Holdings, DUG Midcontinent, 2016.

It has also been progressively modifying its completion designs. Generally, Alta Mesa is increasing the number of stages in its stimulations, decreasing stage spacing and increasing average sand per foot. Its most recent wells have been tracking above its type curve of 640 Mboe.

Additionally, the operator is testing well density spacing, with several pilots underway.

“We’ve got a large, continuous leasehold; we have a great team with experience and good partnerships with vendors,” Chappelle said. “We’ve progressed in our drilling and completion strategies to where we have repeatable, consistent results. Certainly, every well is a challenge, but we feel that we have a process that helps us define how best to exploit this acreage.”

Nonop Stack strategy

Another firm, this one a capital provider, also appreciates the advantages of the DrillCo structure in general and the Stack Play in particular.

Marc Rowland, founder and senior managing directorof IOG Capital LP, said his group closed 17 transactions in the past 16 months and has committed just under $700 million in drilling capital or partner equity. About $275 million of that total is invested to date.

“In terms of number of transactions, we’re among the most active DrillCo providers,” Rowland said. IOG invests in nonoperated working interest positions with quality operators in the onshore U.S. Today, it has ownership in about 230 active wells.

Generally, the DrillCo programs fit operators that are seeking development capital for existing assets. To be attractive for a DrillCo investment, IOG looks for single-well economics with IRRs above 30% at current strip pricing. If that is present, a program hurdle is established with specified IRR and return on investment levels.

Drilling programs typically span 12 to 24 months, and IOG will pay for up to 90% of the capex. In return, it receives the corresponding share of working interest in the drilling unit. After the hurdle rate is achieved, IOG returns the majority of the working interest to the operator.

For operators, benefits include the ability to make leases HBP, to meet drilling or midstream contract obligations, to upgrade offset locations to PUDs [proved undeveloped reserves] and to accelerate the net present value of the asset. Importantly, the financing is non-recourse to the operator.

“Most of the present value of a project is transferred to the operator,” Rowland said. “We only participate in the wells we fund. If an operator has 10,000 acres to drilland it needs 20 wells on 10% to 20% of its acreage to prove the concept, it maintains 100% of the upside and the ability to book PUDs.”

In Oklahoma, IOG has five areas of mutual interest with four different operators; four of these areas are in the western Stack Play. IOG has 12,300 net ownership acres in the western Stack, mainly in Dewey and Blaine counties, with three different operators.

“We’re active today with six rigs in the area, including 12 wells that are drilling or completing, and 28 wells in the planning or permitting stages,” Rowland said, adding that 25 horizontal wells are already producing.

The Stack fits very well into IOG’s portfolio for several reasons. The play offers undeveloped leasehold offsetting existing horizontal and vertical production; it is being worked by established operating teams in which key personnel have decades of experience; ample midstream infrastructure is already in place; and it offers a repeatable inventory of economically attractive wells.

“I like Oklahoma—it’s a great state to do business in. I’ve been drilling wells here since 1989. It’s a friendly place for us to own property,” Rowland said.

“We get to see most of the plays and the economics associated with these across the U.S. The Stack offers great opportunities. With the exception of parts of the Permian Basin, the Stack economic terms exceed all of the plays in the U.S.”

Peggy Williams can be reached at pwilliams@hartenergy.com.