<<Read Part 1: Bakken Update: How To Invest In The Delaware Basin

<<Read Part 2: Bakken Update: How And Where To Invest In The Permian

The Delaware Basin remains one of the top US unconventional basins. It rivals the STACK/SCOOP in Oklahoma and Midland Basin just to the east.West Texas geology is superior for several reasons. 

The rock is exceptional, and seems to stimulate better than other areas of the country. This means that when fracked, it breaks up better, letting loose resource.Newer Mega-Frac completion styles are working so well that up to 3,000 lbs. of sand are needed per foot. Operators all have different completion methods, but even the most conservative are still using more than 2,000 lbs/ft.

This benefits frac sand producers. These include US Silica (SLCA), Emerge (EMES), Hi-Crush (HCLP), and Fairmount (FMSA).This could be just the beginning, as operators continue to get better. These big frac jobs also have controlled frac lengths. So the fractures do not push as deep into the shale. It should allow operators to place locations closer together without worry of excessive well communication.

(source: Matador)

The Wolfbone is one of the most successful unconventional vertical oil plays in the US, and possibly the world. It is targeted in the southern Delaware, but is a possible play in the north too. It covers roughly 4,100 feet from the Brushy Canyon to the deepest Wolfcamp interval. 

(Source: OilandGas360)

The Wolfbone has been targeted in southeast Reeves and northwest Pecos.It is possible this will extend further north and south from its initial locations.Operators like Anadarko (APC), BHP (BHP), Clayton Williams (CWEI), Energen (EGN), Occidental (OXY), and others have all drilled and completed Wolfbone wells.It provides infill upside in leasehold currently not seeing activity. 

Anadarko is more DJ Basin focused, spending $1.3 Billion. Of its $3.6 billion total 2016 cap ex, $800 million will be spent on the Delaware Basin. 

(Source: Anadarko)

Well costs continue to decrease. At the end of 2014, D&C costs were almost $12 million. This has decreased to $5.2 million for pad locations. It has excellent acreage focused on Loving, but also in Culberson, Ward and Reeves. It has 255,000 net acres.  t will continue to focus on the Wolfcamp A, but there are significant opportunities throughout this stacked zone. Loving is the deepest part of the basin, and many consider it to be the Delaware core. It is in the oil-prone west Texas acreage. Wells average 80% liquids. 

(Source: Anadarko)

The difference is substantial from one end of Loving to the next.We see oil percentages decrease from 46% to 70%.EURs improve significantly in the west, as do well pressures. 

PDC Energy (PDCE) recently spent $1.5 billion to enter the Delaware.It has 57,000 net acres in Reeves and Culberson counties. 

(Source: PDC Energy)

41,000 net acres are located in Reeves.Its acreage is surrounded by excellent operators like Chevron (CVX), Concho (CXO), Cimarex (XEC) and EOG (EOG). The eastern prospect has had excellent results in both the Wolfcamp A and B. Using 5,000 foot laterals, EURs in the A are 1,000 MBOE. The Wolfcamp B EURs are 750 MBOE.The central prospect may be better. Central Wolfcamp A and B intervals model EURs of 1,050 MBOE. The Wolfcamp C average EUR is 1,400 MBOE.  Its western acreage is focusing on the Wolfcamp A. Considerable de-risking in the west is possible when compared to the east.PDCE’s leasehold has a total pay zone thickness over 3,000 feet from the 1^st Bone Spring to the bottom of the Wolfcamp D.10,000 foot single well horizontals have a cost of approximately $9.5 million. 

Noble (NBL) has 45,000 acres in Reeves County.It is seeing a very large increase in production per well using Mega-Frac’s.

(Source: Noble)

It has increased sand usage from 1,800 lbs/ft to 3,000. Cluster spacing has decreased from 60 to every 40 feet. Current completions are outperforming its curve by 75%. It is only Noble’s third completion, so we could see considerable upside.

Carrizo (CRZO) has 22,200 net acres in the Delaware. It continues to focus on its low cost Eagle Ford leasehold. 

(Source: Carrizo)

Approximately 12,000 net acres are located on the Culberson/Reeves border. There are a number of targets in the Bone Spring and Wolfcamp. Carrizo is just beginning to work west Texas, so it is possible some completions could push its stock higher. 

(Source: Carrizo)

Other operators have produced results way above its Eagle Ford curve. Some producing almost twice as much oil. These locations will produce large volumes of natural gas. So we expect results provide compelling economics when compared to its east Texas core land. 

(Source: Carrizo)

Carrizo has very low breakeven costs of $35/bbl.This is even better than EOG Resources (EOG).Other operators drilling the Delaware are higher.It is very possible that CRZO will be able to drive breakevens lower in an area that many claim to be the lowest in the unconventional US.

Clayton Williams (CWEI) has 66,000 net acres in Reeves County. 

(Source: Clayton Williams)

Although its acreage is excellent, the company has a very large debt load. Many think CWEI provides value when in reality it has a very tough road ahead. It has de-risked the Wolfcamp A and C. It has had success with the vertical Wolfbone as well. There are up to 5 possible oil producing zones currently. It is possible this number could increase. The pay zone is over 3,500 feet thick. Well costs are $6 million, but CWEI is using lateral lengths a little over a mile. 

This is a riskier play and based off of EV/EBITDA it is not cheap. Another issue is its relatively large sub-par acreage in the Eaglebine. This acreage is to the northeast of the Eagle Ford and has had mixed results.It may need $80/bbl WTI to see growth in production. 

Chevron (CVX) has over 2 million acres in the Permian.

(Source: Chevron)

This is an old map, but shows how it has acquired large tracts of land at the Texas/New Mexico border.It may be more Delaware focused than Midland, but given the company’s size it isn’t considered highly leveraged. 

Energen (EGN) has over 71,000 net acres in the Delaware Basin.Its largest position is in Reeves.

(Source: Energen)

It only has 11 total locations completed, but has a significant inventory. Its core acreage models EURs of 1,200 to 1,500 MBOE. This model is consistent throughout all Wolfcamp intervals. The non-core type curve is 800 to 1,000 MBOE. Its well design continues to improve. It uses 1,800 to 2,400 lbs of sand per foot. Cluster spacing is just 33 feet. Its five core Wolfcamp wells are tracking an EUR of 1,500 MBOE.

We continue to believe the Delaware Basin provides an opportunity that some may have missed earlier in the Midland Basin. The Delaware, much like the STACK, still could see considerable de-risking. This includes fringe acreage over several intervals.Initial results have been positive, and although early, the play has some of the lowest breakevens in the unconventional US. 

Production may continue to increase in the coming months while production in the Bakken, Eagle Ford and DJ Basin decrease. Operations with the lowest breakeven prices will continue to lead US production growth. Because of this, it is important to look for E&Ps with acreage in these areas. We continue to like and own many of the names highlighted in these articles. This is an overview of Delaware names, but it is important that each investor takes a more in depth look before making an investment.