Ride this Oil Rocket

Peter-FallonThere’s an oil-fired rocket ship sitting on a launchpad in Texas. This isn’t your typical launchpad, however. This one is 250 miles wide and 300 miles long.

It’s called the Permian Basin. It’s one of the hottest new oil-producing areas in the state. A few weeks ago, I wrote about the Eagle Ford shale. It’s a big oil producing shale field in its own right.

The “rocket ship” is an exploration and production (E&P) company poised to make big profits from its wells in the Permian. We’ll discuss it in more detail below. First lets zero in on the Permian itself.

The Permian Basin contains dozens of oil-producing formations. The San Andres, Clear Fork, Yates, Yeso, Bone Spring, Canyon, Avalon, Spraberry, Morrow, Wolfcamp, Ellenberger and Devonian are all part of the Permian Basin.

Oil and natural gas is located at depths from a few hundred feet to over 5 miles below ground. This 59-county area of West Texas is literally swimming in oil.

Check out the map below. It depicts some of the fields mentioned above. Some E&P companies can actually hit eight different oil-bearing layers from one drill pad.

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So far, E&P companies have extracted over 29 billion barrels of oil and 75 trillion cubic feet (Tcf) of natural gas from the Permian. What’s truly amazing however, is what remains. Oil industry experts believe that the Permian still contains more oil and gas than we’ve pumped out in the last 90 years.

We’re going to zero in on a specific area of the Permian launch pad. It’s called the Cline shale. The Cline is underneath the Wolfcamp.

It’s about 140 miles long and 70 miles wide. That’s about 1.6 million acres in total. The Cline is deep, found between 9,000-11,000 feet.

The layer itself is anywhere from 200-550 feet thick. It has a total organic (oil) content of between 2%-8%. The Cline produces light, sweet crude, very similar to what is coming out of the Eagle Ford shale.

The Big Rocket Ship in the Permian

While there are many E&P companies drilling in the Permian, one stands above the rest. Never mind that it has half the acreage of any other E&P company operating there.

Given the complexity of the various shale plays in the Permian, this company has collected more data than any other. As a result, it’s made some very bold predictions about the amount of oil contained in some of the Permian plays.

The rocket ship is Pioneer Natural Resources (NYSE:PXD).  Pioneer is a large E&P company whose primary focus is the Spraberry and Wolfcamp oil fields in the Permian and the Eagle Ford shale play in South Texas.

The CEO of Pioneer, Scott Sheffield recently discussed some significant accomplishments with Jim Cramer on Mad Money. He expects his estimate that the Spraberry Wolfcamp shales might contain as much as 50 billion barrels of recoverable oil “is going to end up being low over time.”

Sheffield followed that up with “we think the numbers are very conservative and we think the numbers will climb up to 75-100 billion [barrels] over time.”

Sheffield said, “We have over 900,000 acres, more than half the acreage [in the play]. We are definitely the 900-pound gorilla in the room.”

Gushers Galore

Sheffield is backing up his bragging rights with monster well production numbers. On November 6, 2013 Pioneer announced its record-breaking well results for its Wolfcamp B well, University 2-20 #12. This well flowed at an initial 24-hour production rate of 3,176 barrels of oil equivalent per day (BOEPD).

A week later on November 13, 2013, Pioneer announced another record-breaking well. The University 7-43 10H was the first well Pioneer drilled in the Wolfcamp D interval. It had a 24-hour production rate of 3,605 BOEPD.

Sheffield’s comments on this well gives investors some idea of the size of the resource Pioneer is sitting on: “[The University 7-43 10H] Wolfcamp D interval well in Andrews County achieved the highest initial production rate from any horizontal interval well in the Midland Basin.

“It extended the productivity of the Wolfcamp play approximately 60 miles west of recent successful industry Wolfcamp drilling activity. This well is also approximately 80 miles north of our industry-best Wolfcamp B interval well in Reagan County (University 2-20 #12).

“In addition, the record initial production rate from our latest Wolfcamp B interval well on our northern acreage (E.T. O’Daniel #1H) further supports our belief that estimated ultimate recoveries (EURs) for horizontal Wolfcamp B interval wells drilled on this acreage will exceed 800 thousand barrels oil equivalent.”

These production rates are astronomical for horizontally drilled wells. While not all of Pioneer’s wells will be as successful as the two listed above, the company has certainly figured out how to drill successful wells in the Permian.

On the day of Pioneer’s latest announcement, the stock jumped nearly 7%. Investors who want to invest in the biggest rocket ship sitting on the Permian launch pad might want to consider adding Pioneer Natural Resources to their portfolio.

Profitably yours,

Peter Fallon.

 

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