The price of oil has created significant changes to oil play viability. At $50/bbl, many of the major core plays are still productive. Those outside the Bakken, Eagle Ford, Permian and newly ordained SCOOP have slowed to a standstill. Even fringe leasehold of the best plays are having problems, and may not see much by the way of production until we get to 2018. Anything is possible, but many areas need $70 to $80/bbl WTI to be economic, and those acres will have to wait. Some operators stuck hundreds of millions of dollars into areas like the Eaglebine, Tuscaloosa and Mississippian. If those operators don’t have better acreage to fall back on, then its days may be numbered. 

We have spoken some about the plays we like in 2016 and 2017, and believe in exercising caution in times of overproduction. It is difficult to navigate oil prices, so we think areas with the lowest breakeven are the best areas to put dollars to work. That isn't to say these names will necessarily outperform most others, just that its important to decrease the chances of losses after this type of a pullback. It is also important to remember volatility will remain high, so operators that can live within the low end of prices will likely live to fight another day. Betting on the overly levered with fringe acreage is a good way to toss money down the proverbial drain.

We have supported the Permian names in both the Delaware and Midland, there are other areas of note. New plays can sometimes be the best plays with respect to growth. Although the Permian is excellent, the Midland Basin has already been de-risked in many areas and through several intervals. The most upside, and downside can be achieved through the unknown. Those with a penchant for risk will invest in these areas in hopes of a better return. Although many thought the Big 3 were the best plays in the US may have recently found they were incorrect. Keep in mind, this play has been worked for a very long time, but no one realized just how good it was.

The SCOOP/STACK play in Oklahoma may be one of those plays initially deemed a little better than average, when in reality it is a top play. The reason I say this, is after this period of time most geologists would have figured out where the best plays may be.It is difficult to know which intervals will outperform, but a play of this magnitude is difficult to miss. There are reasons, as the US has a massive collection of rock capable of producing oil and natural gas.

Many times these areas contain several intervals. We also have seen a big move towards combo plays. By this I mean intervals that produce decent volumes of oil and natural gas. When oil prices were very high when compared to natural gas, there was less value in non-liquids. It is also important to note what natural gas does when it produces in concert with liquids. Wells with higher percentages of gas also have higher well pressures. The same is true for deeper formations. As a general rule, the deeper the shale the higher the well pressures.Greater pressures mean resource is more actively pushed up and out of the well bore. Since more resource is returned in a shorter period of time, payback times are shorter. Newer well designs like MegaFracs and Slickwater work better in higher well pressure environments. The combination of lower oil prices and better well design have caused a shift to these types of plays.

Devon (DVN) paints a nice picture of how the play is separated in windows. This much like the Eagle Ford and Utica, as each window it a little different with respect to production. Moving from the west to east we see oil production increase and well pressures decrease. The core STACK is located in the over pressured oil window. This window has an average IP30 of 60% oil. This decreases with EURs, but that is a fairly normal occurrence in plays over the life of a well. 

Continental (CLR) provides single well breakeven economics in the above slide, and the SCOOP, SCOOP Springer and STACK are the top, sixth and seven best plays.Research can differ depending on who is doing it, but the data from Evercore ISI seems to point to the SCOOP/STACK as two of the better plays in the country.Everyone does not see it the same way. 

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(Source: Jones Energy)

Jones (JONE) used data from Wells Fargo (WFC) and it believes the lowest breakevens are in the Niobrara and Wolfcamp B.The STACK appears as number six on this list.It is important to consider all data before being certain on which play needs the lowest oil price to be economic.Each bank will use different sets of data and come up with differing results.Plays that are consistently in the top five, will more than likely outperform.It is also important to see where operators are focusing cap ex.In general, E&Ps will have flagship type plays.So those favored highly by operators are probably the best choice.

The STACK is Devon’s (DVN) top play.It is currently spending a third of its 2016 cap ex here.This is more than its Delaware Basin acreage (20%).It currently has 585,000 net acres.It has a large presence in southwest Lea County of New Mexico.This is at the play’s core.The Delaware core has several intervals to focus on.This includes the Leonard, Delaware, Bone Spring, and Wolfcamp as viable targets. 

When focusing on a play, there are a couple of important and simple variables to consider.The first is production and the second is costs.One must be able to estimate revenues based on average production.We also need to make sure costs don’t cut into revenues so much economics become poor.The increased traffic in the SCOOP/STACK has provided a significant number of operator results. 

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​(Source: Devon)

Its STACK play has the lowest costs in its portfolio.The best production results have been in southwest Kingfisher and eastern Blaine counties.Meramec is two intervals below the Spinger interval and two above the Woodford. 

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​(Source: Devon)

Returns are excellent in the Meramec, Delware Basin, Eagle Ford and Rockies.The IRR-ATAX w/ G&A is over 20%.The Woodford is about 10% less.Both are still good, but Meramec is better with respect to the STACK. 

Cimarex (XEC) is also present in the Delaware Basin and SCOOP/STACK.It favors the Delaware with approximately 60% of its cap ex going to the Wolfcamp and Bone Spring.It is still spending a considerable amount of its dollars in Oklahoma.Its Woodford wells have a high percentage of natural gas.

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​(Source: Cimarex)

These 8 well pads have been quite good with first year production between 2.1 and 2.2 Bcfe.Although these wells are natural gas heavy, it is still approximately 40% liquids.NGL prices have really tanked over the past few years, which hasn’t helped returns.Meramec wells have better oil cuts.It averages 44% natural gas, 33% oil, and 23% NGLs. 

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​(Source: Cimarex)

Not only are these wells producing more from a mcfe basis, it also produces more oil.Well costs are probably cheaper than the Woodford since the Meramec is more shallow. Marathon (MRO) recently added to its STACK footprint.

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​(Source: Marathon)

The returns are very good.Even at $50/bbl WTI, these wells have IRRs of 60% to 80%.Payback is reached around 1.5 years.The average well results for its acquisition from Payrock are approximately 55,000 BOE at 90 days for a 5000 foot lateral.Its best well is approximately 115,000 BOE.At $65 oil, IRRs increase to over 150%.Well costs are between $4 and $4.5 million/well.It added this leasehold for $11,800/acre.

Newfield (NFX) has reported some interesting STACK data as well.It has been focusing on southwest Kingfisher County.Its oil and NGL cuts have been greater.Oil has averaged 40% and NGLs 30%.2 mile laterals are being drilled and completed for just $6.2 million. 

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​(Source: Newfield)

Costs have continued to come in and current pre-tax RORs are at 40%.Continental (CLR) also has very good return rates in Oklahoma.

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​(Source: Continental)

The over-pressured STACK sees RORs of around 65% at $50 oil and $11 million in well costs.This increases to almost 90% when it reaches $9.5 million.The NW Cana JDA has almost 70% RORs at $3 natural gas.In reality, Oklahoma is one of the best areas in the country.When compared to the Bakken, CLR is using a core well ROR.That provides a good comparison, to show the validity of the STACK at today’s oil prices.It is possible, STACK well costs could come in significantly.I would not be surprised if we are $8 to $8.5 million by the end of next year.

Continental (CLR) has seen much better results.This is why it is spending $464 million on the SCOOP, STACK and NW Cana.It is also why 15 of its 19 wells are located in Oklahoma.

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​(Source: Continental)

CLR’s STACK leasehold is in Blaine and Dewey counties.Most of the other operators have focused on Kingfisher and Canadian.The majority of it acreage is in the SCOOP which is to the south and east of STACK.CLR is targeting the Woodford and Springer intervals here. 

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​(Source: Continental)

Its acreage covers several counties including Grady, Garvin, McClain, Stephens, Carter, Murray, and Love.This play also has windows where resource changes.The oil and condensate windows are currently being targeted.CLR is not currently developing the Springer interval.Although it looks to be productive, higher oil prices are needed.

Looking at the STACK, there are several players seeing very good results at today’s prices.

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​(Source: Continental)

Continental (CLR) has documented production on several locations.The majority of its wells are in Blaine County, to the west of Kingfisher.Kingfisher has been thought of as core, but well pressures rise to the west.These increased well pressures are due to a higher percentage of natural gas and/or condensate.These wells still produce high percentages of oil.Ludwig has produced very well.It has 9 months of production and has already produced 186,750 barrels of oil and 361,090 Mcf of natural gas (this does not take into consideration barrels of NGLs).Using $50/bbl oil and $2.87/Mcf natural gas, 9-month revenues are $10.4 million.This reduces significantly after we subtract costs of roughly $2.54 million.Over that time frame, this well paid back approximately $7.86 million of the $11 million in well costs.As far as US unconventional wells go, this is as good as the Delware and Midland Basin core.Boden is a huge well producing almost as much resource on a Boe basis as Ludwig in 123 less days.It is important to note this well is producing a lot less oil, but still an excellent result.

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​(Source: Continental)

The CLR STACK curve provides significant production in the first 60 months.Although EURs mean very little, this model produces 984,000 barrels of oil over well life.The most important factor is well pressures.These wells continue to produce at a very high rate after a significant period of time.Because well pressures remain high, the decline curve is shallow.This is why the initial oil decline is just 76% and gas is 60%.These are large improvements since horizontal wells began producing.If we look at another specific STACK well located in Kingfisher County, we find further promising results.Cimarex saw the first production from Wort 1-21H on 12/01/14. 

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​(Source: Welldatabase.com)

This well is located to the northwest of Oklahoma City.This area is littered with well pads, as the area is full of vertical locations.

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​(Source: Welldatabase.com)

The map below provides a close up of the Wort well pad.

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​(Source: Welldatabase.com)

Wort has produced significant volumes of crude and natural gas.Initial gas production should be much greater, but the first four months were flared. 

No crude production was logged in May, but if the first five months are averaged Wort produced almost 24,000 BO/month.Well revenues at $50/bbl oil and $2.90/Mcf are $6,655,701.Revenues could have increased by $2 to $1.5 million if the gas was monetized the first four months.In summary, the STACK is shaping up to be one of the best unconventional plays in the United States.The Midland and Delware basins probably are the safest way to play low oil prices.It offers good rates of return from several different intervals.The STACK may have more upside.Although it probably doesn’t have as many zones to or the overall shale thickness, it is a newer play.Well costs will decrease more, and we think production per well will increase at a greater rate.We are already seeing excellent returns at today’s oil price.Given improvements seen in STACK economics this year, we expect the play to be one of the top areas in the country.