Looking 12 months out many are optimistic for oil. Most believe that $45/bbl WTI cannot support the majority of US unconventional operators. This is probably true, as the Permian and STACK may be the only oil bearing plays that are profitable at those levels. Operators in those plays are not super excited about that price, and most would probably be just holding on. If an oil price recovery is in the works, how does one play it? A smart investor will stick with good balance sheets, but also concerned about acreage. 

Geology is the key for operators, as plays that work especially well with Mega-Frac completion designs will prosper. Others could have some problems. As we have said in the past, the Bakken could have a rough time going forward.  This has nothing to do with geology and more to do with taxes and differentials. North Dakota has one of the highest production tax rates in the country. Although this has been decreased recently, it leads operators to plays in Oklahoma and Texas.

Differentials explained simply is the cost to transport barrels of crude to the final customer, refiners. Refineries are positioned on the coasts. There is a good reason for this, imports. Refineries purchase many different types of crude whether sour or sweet, light or heavy. There are other types and mixes depending on where the crude is from, but refiners purchase the types that are the most advantaged. The crack spread is the margin a refiner makes when it cracks crude into refined products.There are many factors the determine this margin, but the refiner buys what will make it more money. Many ask why our refiners can’t just refine all light/sweet crude. Although this would be great for producers in the United States, it would place refiners at a distinct disadvantage. The distance of the largest refining capacity in the US, the Gulf Coast, is very close to Oklahoma. Much of this is in Texas which keeps differentials low in that locale. North Dakota is very far away from the Gulf Coast, but also has a great distance to California and the Northwest. These areas do not have pipe in the ground.  The rails are more expensive and California has seen many communities move to keep railed oil out of their areas. 

(Source: Tudor Pickering Holt & Co., US Global Investors)

Texas has an advantage, and we are seeing the focus on the Delaware Basin. This is the western Basin with in the Permian. The Delaware is separated from the Midland Basin by the Central Basin Platform. This area is an uplift that has been the home of a great deal of vertical production over the years. The Delaware has some areas that produce excellent returns at low prices. We expect production from the Delaware to drive growth while Bakken and Eagle Ford declines. The play is huge. The map shows how much bigger it is than the Bakken and Eagle Ford. The total payzone is also much thicker. This provides more locations per sections. Many operators are developing both by intermingling horizontals and verticals.

(Source: Geological Data Services)

Depth is what separates the Midland and Delaware Basins. This is important, as deeper generally means better well pressures. Using depth as our guide, we find the best area in Culberson County, Texas. This is by no means a guarantee. There are a large number of variables that control production rates, and this is just one. 

The Delaware is best explained as a series of parts. Devon (DVN) does an excellent job of explaining the play.

(Click on image to enlarge)

(Source: Devon)

The Delaware Basin has a large number of intervals to target. To the north there is the Bone Spring. This extends into Lea and Eddy counties in New Mexico. The Wolfcamp covers the largest area.  It stretches from New Mexico into Texas and the southern part of the Delaware.  This is what many are targeting in Culberson, Loving and Pecos counties. The Leonard shale and Delaware sands are mainly in New Mexico. The Bone Spring has 3 intervals. So if an operator has leasehold in southern Lea County, it would have the Leonard, Delaware, and multiple Bone Spring and Wolfcamp targets. Perfect area for pad drilling. This map does provide a decent look into where the resource is, but keep in mind, operators have de-risked counties differently. This could mean that one has see the extent of each interval cover a larger or smaller number of sections.  We are finding that the play is much better than expected and it may reach farther.

(Click on image to enlarge)

(Source: EOG)

EOG Resources (EOG) shows how thick the Delaware payzone is, and how many oil-bearing intervals it has. At 4,800 feet, it will support massive development. There are at least nine intervals that can support multiple well locations depending on the area. The Bone Spring and Wolfcamp are seeing the most work, but tests are being done on all nine. There are also some deeper, but we haven’t seen as much traffic with respect to that source rock. This slide compares the middle Bakken at just 40 feet, but this isnt entirely correct as thickness reaches approximately 100 feet near the Nesson Anticline. The difference is still great.

When looking at the Delaware Basin, it is best if it is broken up into to specific plays. Concho (CXO ) has a large Delaware position and provides an excellent view of the northern and southern plays. 

(Click on image to enlarge)

(Source: Concho)

Its 355,000 gross acres covers a huge area. The crude connector system provides an idea of where the largest volumes of oil are coming from.  We see completions from northern Eddy and Lea down to northern Culberson. The main targets are the Bone Springs, Wolfcamp and Avalon. The Avalon is the shallowest and has lower pressures. The results seem to improve with depth from an EUR perspective. The Wolfcamp has the best estimated resource, but the increased natural gas also improves well pressures. Concho has focused recent wells in northern Culberson, southern Eddy and Lea counties. These leaseholds are closer to the core.

(Click on image to enlarge)

(Source: Concho)

The southern Delaware is focused on the Wolfcamp. This differs from the Bone Springs in the north. Concho is developing both plays with four rigs, which seems to state the plays are somewhat equal from an economic standpoint. Concho is seeing some decent results from the 3^rd Bone Spring, so there may be some upside potential from this interval. 

(Click on image to enlarge)

(Source: Diamondback)

Diamondback (FANG) provides details as to the geological makeup of the play. The west is more gas weighted while the east increases volumes of crude. The IP90 sees the largest number of bbls of oil in Lea County. There are other hotspots in Eddy, Loving, Culberson, etc. Some of this depends on well design, as some wells are just producing more using Mega-Fracs. We do see a significant percentage increase in gas in southwest Eddy, western Loving and eastern Culberson. 

In summary, we are seeing significant activity in the Delaware Basin. This includes both acreage acquisitions and locations drilled. This area will be one area of growth even if oil is below $50/bbl. Delaware operators have an advantage given the low D&C costs and very good initial production results. We expect more deals to be made in the basin which should support acreage values. It has a very thick payzone that includes 9 intervals.  Since many areas are not de-risked, there is additional upside.