Can 20 Billion Barrels of Oil Ignite Growth for These 4 Oil Stocks?

Everything is bigger in Texas. That was the message sent by the U.S. Geological Survey late last year when it announced that the Wolfcamp Shale Formation in West Texas' Permian Basin holds an estimated 20 billion barrels of oil. It's the largest continuous oil formation the agency has ever assessed in the United States. 

The agency admitted that it likely holds even more than that, actually, since the estimate only included the portion of the Wolfcamp shale that extends into the Midland Basin. It also spans into the Delaware Basin. In a bit of Russian doll categorization, both the Midland Basin and Delaware Basin are subsets of the Permian Basin, which part of the vocabulary of most energy investors by now.

In the last 12 months, the Midland Basin and Delaware Basin may have been added to your vocabulary, too. Many oil stocks have purchased acreage in the unconventional plays and are counting on them to drive future production gains. A few have sold off all other assets to focus exclusively on the basin. Whoah.

Considering that 20 billion barrels of oil is at stake (plus 16 trillion cubic feet of natural gas and 1.6 billion barrels of other liquids), can these oil stocks lean on the Wolfcamp shale to realize their growth potential?

Image source: Getty Images.

These oil stocks have an eye for the unconventional

No company has benefited more from the potential of the Wolfcamp shale quite like Resolute Energy (NYSE: REN). The stock is up over 352% in the last year alone, although it returned over 1,000% from November 2015 to November 2016. The company blew up when energy prices crashed thanks to its massive debt load, but has strategically fought its way back with promises of impressive growth -- mostly built from assets in the Delaware Basin.

Resolute Energy is in the process of selling its only other assets to become a pure-play Delaware Basin producer. The move could pay off handsomely. Consider that the company averaged production of 15,100 barrels of oil equivalent per day (boe/d) in 2016, but that will rise to 26,000 boe/d in 2017 and 30,000 boe/d in 2018. All from the Delaware Basin. 

It's far the only oil stock looking to the Wolfcamp shale and broader Delaware Basin for growth:    

Source: Company presentations.

On July 11, 2017 Halcon Resources announced the sale of its Williston Basin assets for $1.4 billion, which means it will become a one-basin company. That also means it will join Resolute Energy as pure play Delaware Basin producers. Investors are certainly on board with that, judging by the stock performance of each company. In fact, Halcon Resources stock is up 53% since the announcement. 

Both Resolute Energy and Halcon Resources have something else in common: relying on growth expectations from the Delaware Basin to pay off massive debt piles. While both management teams could be proven correct, there isn't much room for error. The balance sheets of both companies are, unfortunately, major red flags.

The goods news for energy investors is that established companies aren't overlooking the Wolfcamp shale. And since they have considerably more financial flexibility, from both their size and healthier balance sheets, they're positioned to gain considerably more from the 20 billion barrel bounty at stake.

REN data by YCharts

ConocoPhillips has worked tirelessly to downsize its operations to focus on assets with the highest potential and then invest to increase the operating efficiency of those even further. It hasn't held onto too many big, untapped projects save for its 75,000 acres in the Delaware Basin. It even refers to its Permian Basin assets as a "shiny object", perhaps poking fun at the hype in the region created by smaller peers. Then again, it's not all hype. 

The company owns a dominant position in the Delaware Basin to be sure, but Anadarko Petroleum has taken it to another level with an astounding 235,000 net acres. It's investing nearly $2.2 billion in the assets this year alone. But it isn't done. The company wants to add another 300 miles of gas pipelines and 600 million cubic feet per day of processing capacity, another 250 miles of oil pipelines and 180,000 barrels of oil treating capacity per day, and another 230 miles of water pipelines. 

That brings up an important point for investors to consider. The advantage of making massive land grabs in the Delaware Basin is not just gaining more future production, but that you can build many super long laterals in the mostly continuous oil play. Longer laterals mean more production per well and fewer wells overall. That lowers production costs substantially.

ConocoPhillips states that 10,000-foot laterals have played a big role in cutting well completion costs in half since 2014 and increase value by more than 30%. While all four companies mentioned own mostly contiguous acreage capable of supporting laterals of this size, the larger holdings of ConocoPhillips and Anadarko Petroleum may provide the biggest advantage. 

What does it mean for investors?

Over the past several years, many oil producers have raced to acquire assets in the Wolfcamp shale and Delaware Basin, which the USGS estimates could hold more than 20 billion barrels of oil. The potential for years of growth is amazing, but not all opportunities are equal.

Resolute Energy and Halcon Resources will have little room for error thanks to high levels of debt. Meanwhile, while ConocoPhillips and Anadarko Petroleum own large acreage in the region, the assets will only be one piece of each producer's expansive portfolio. But no matter how investors look at it, the conclusion is clear: the Delaware Basin is going to generate a lot of oil (and cash) in the next several decades. It's definitely an oil play to keep an eye on, at the very least.