This WWI Oil Stash Is Set To Pay Off Again
It wouldn’t be too far off to say that Oklahoma won World War I.
That is, the majority of fuel that powered the ships, planes and tanks for U.S. forces came from the Sooner state’s oil patch.
Without that fuel, maybe the Western Front falls. Hey, crazier things have happened.
Today, underneath the fields that supplied crude oil for WWI, lies Oklahoma’s second wave of oil riches. And although this oil may not win our country a hot war overseas, it’ll surely help win a few battles for the American economy. Here’s how to get your share…
In the 1800s native Americans used it as medicine. In Oklahoma, along creeks, oil seeps would ooze black goo that locals believed had healing power.
Later on more conventional uses spurred the demand for OK’s black gold. By the early 1900s Tulsa was considered the “oil capital of the world.” And by 1927 the state was producing over 700,000 barrels per day. Indeed, other than fueling WWI efforts, Oklahoma’s crude helped fuel the plentiful days of the roaring 1920s.
But ever since the late 1970s oil production has been on the decline. The heydays were over, or so they thought as recently as 2007.
Today Oklahoma’s oil fields are coming to life, again. Since 2007, oil production in the state is up 75%. Daily production currently sits above 270,000 barrels – making Oklahoma the 5th largest U.S. producing state.
The turnaround is due to a massive influx of shale drilling – and some pretty fantastic results to boot!
For example, an active driller in the area, Range Resources, is seeing 600,000 barrel of oil equivalent (boe) in estimated ultimate recovery for some of its latest wells in OK’s Mississippi Lime formation. In other words, when the engineers crunch the numbers, an average well will produce 600k barrels of oil throughout its life. All at a cost somewhere around $4-7 million per well.
Those are “attractive economics”, says Chief Operating Officer Ray Walker.
Doing the simple math: 600,000 barrels at $85 oil represents $51 million in total payout. For a well that costs, on the high end, $7 million? That’s a 620% return on the company’s investment – and we’re only talking about one well!
And to be clear, Range isn’t the only big player in OK’s oil boom. I’m hearing the same stories from smaller companies like Eagle Energy and other big fish, like Apache Oil Co. And as you’ll see the production isn’t just coming from one formation, but many.
Plus, besides those favorable economics, Oklahoma is stacked with infrastructure. Some of the oil coming from the Mississippi Lime, Granite Wash and Woodford formations is heading to local refineries in place of oil from Cushing. In other words, local refiners are taking local oil instead of the stuff coming down the pipe from Canada or North Dakota — it’s good to be in the right neighborhood.
They didn’t call Tulsa, OK the “oil capital of the world” back in the early 1900’s for nothing. This energy hub is home to some of America’s most extensive oil and gas infrastructure. After all, Cushing, OK (a small town near the center of the state) is the nexus for America’s oil infrastructure.
As a recent example, Range expects to send some of its newfound Mississippi Lime crude to a nearby Conoco refinery – Superior and Mustang also have refineries in the area. The downstream logistics are already there, Walker says. “Sometimes we’re hauling oil less than a mile” he commented.
Compared to, say, North Dakota’s Bakken Formation (over 1,000 miles from Cushing), the infrastructure options for Oklahoma’s shale plays are much more favorable and could make the local plays much more economic.
What Does This Oklahoma Action Tell Us?
The quick takeaway from what we’ve discussed is that even in some rather obscure formations in Oklahoma we’re seeing a lot of oil and gas head to market.
Just micro-analyzing the OK plays – the Mississippi Lime, Granite Wash, Cleveland, Tonkawa and Woodford formations – we could be looking at decades (with an “s”) of drilling. Then, widen your perspective including shale plays like the Bakken, Eagle Ford, Permian, Wolfcamp, Marcellus, Niobrara, Monterey (plus others) and you’ll soon see the U.S. has reestablished itself as the world’s prominent energy powerhouse.
According to broad estimates, the U.S. is expected to hold the top spot through 2017 – but from what I’m seeing America’s energy comeback could last much, much longer.
This shale boom isn’t a flash in the pan, either – heck, it’s more akin to a slow cooker. The companies that are making money and producing oil and gas today could be set to cash in for many years to come. Same goes for the companies that support them (think: seismic guys, rig owners, midstream companies and more!)
Three Ways To Cash In On OK’s Boom…
As the shale industry in the U.S. evolves so do the profit opportunities. Here are my most recent takeaways from my trip to Oklahoma…
#1 Bet on the seismic guys. A common theme that we’ve seen throughout the shale boom is the need for good information on new formations. Besides having data from existing wells – in well-pocked areas like Oklahoma and Texas – companies are continually turning to seismic data. By bouncing sound waves off the underground formations seismic imaging can give engineers and geoscientists an underground, 3D map of the play they’re exploring.
Also coming down the pipe is the ability to get more well data while drilling. Through what’s called “logging while drilling” (LWD) companies can continue to get realtime, usable data from the formation they’re working in.
Seismic and logging technology is helping to locate the “X” on the map for oil drillers. Sweet spots ahoy!
There are plenty of pure play seismic companies out there, all of which are worth a look. But some of the bigger names in the business like Schlumberger (SLB) and Baker Hughes (BHI) can also help drillers add barrels to their bottom line. [Schlumberger owns WesternGeco – a company that provides onshore and offshore seismic data. And Baker Hughes is one of the industry’s pioneers for LWD solutions.]
#2 Rigs are still a good bet. Even though drillers are becoming more efficient with rigs and getting more oil with less rig time, the rig industry here in the U.S. will enjoy a sustained boom for years to come. A rig owner with lots of inventory – from standard rigs to high-tech “walking” rigs – can do very well over the next 5-10 years. Although Nabors (NBR) has traded sideways for the past few years, I still expect to see a bump in their share price.
#3 Midstream is a must. Whether you’re producing in Oklahoma or North Dakota you’ve got to have a way to store, ship and process your oil, natural gas and NGLs.
The companies that own the midstream infrastructure – storage containers, pipelines and processing facilities – are set to cash in on for years to come.
We’ve covered one company that’s active in the OK area, DCP Midstream (DPM) so I won’t cover them much more in this issue. But there are a few other companies that you may not be fully familiar with.
One player in the Texas panhandle (an area that shares oil and gas formations with Oklahoma) is Eagle Rock Energy Partners LP (EROC). This company is strategic partners with BP, Apache and Anadarko – so they should enjoy a lot of business in the years to come. Also of note is the companies “transloading” ability.
Transloading is the ability to change from one mode of transportation to another – importantly here we’re talking about rail. That is, if Eagle Rock sees better economics via rail it has the transloading ability to switch from truck or pipe to track. As Roger Fox, senior VP at Eagle Rock says, “rail is more than just a bridge.” So the optionality that Eagle Rock enjoys could prove to be profitable.
The last midstream company I’ll cover is ONEOK (OKE.) Pronounced “one oak” this midstream player has plenty of upcoming business in America’s energy boom. Along with exposure to the booming Bakken – through storage, pipeline and processing – ONEOK also has NGL exposure to the midcontinent region.
All said, Oklahoma’s new oil resurgence is a reminder that America’s energy future is bright.
The fields that once fueled America’s good old days are roaring back. Best of all, the profit train is still boarding.
Keep your boots muddy,
Original article posted on Daily Resource Hunter