5 Stocks to Play the Mississippi Lime

I'll admit it -- I'm biased toward shale. When a friend approached me at a dinner party last week to discuss the ins and outs of hydraulic fracturing, I waxed poetic on the Marcellus and the Utica, discussing the pros and cons of fracking with an effusiveness I typically reserve for conversations about James Baldwin or the Brill Building or macaroni and cheese. Not once did I mention the magic that's going on in the Mississippi Lime. I'm as guilty as anyone for neglecting limestone -- until today.

Where is it, what is it?
Back before you were born, shallow seas covered most of Oklahoma. Over time, the seas dried up and left behind plenty of fossils and other decaying organic matter. Now, stretching beneath the earth's surface in southern Kansas and northern Oklahoma are thick layers of limestone packed with natural gas, natural gas liquids, and oil.

One hundred years ago, the Mississippi Lime boomed with oil production from vertical wells. Eventually, these wells tapped out, and the industry packed up and left. But now, the boys are back in town, utilizing horizontal drilling and hydraulic fracturing to take advantage of the surprisingly vast untapped oil and NGL reserves.

What's the big deal?
Oil and gas producers are clamoring to find plays rich in oil and NGLs right now because they are far more lucrative than methane, also known as dry gas. NGLs track the West Texas Intermediate and generally sell for about 50% of the price of a barrel of oil. The price of methane is incredibly low in the U.S. right now, selling for less than $4.00 per MmBtu.

Let's use an actual example to demonstrate the significance of the price disparity. SandRidge Energy (NYSE: SD  ) is one of the biggest players in the Mississippi Lime. Take a look at this chart from its most recent quarterly report.

Source: Company press release.

Though the company produces significantly more natural gas, the price of oil does all the work on the bottom line. This is the appeal of drilling in the Mississippi Lime: The formation's ratio is estimated to be 52% to 55% oil.

The other upside of this region is that the porosity and natural fractures in the limestone mean lower costs associated with hydraulic fracturing. Drilling expenses are often half of what they would be in a shale play.

Other players
SandRidge isn't the only producer looking to cash in on the Mississippi Lime. The chart below shows the net acreage for some of the other big players in the region.

Company

Net Acreage

SandRidge Energy 1,500,000
Chesapeake Energy (NYSE: CHK  ) 1,400,000
Devon Energy (NYSE: DVN  ) 150,000
Range Resources (NYSE: RRC  ) 45,000
PetroQuest Energy (NYSE: PQ  ) 28,250

Source: Company presentations.

These companies should be familiar to natural gas investors. Range Resources is frequently a first-mover in unconventional plays, and Chesapeake seems to own millions of acres in every natural gas play in the country, though it typically aims to sell large swaths of its holdings to other companies.

Mississippi Lime pure play
SandRidge is really the dominant player in the Lime right now though. The company is developing two different regions there and uses a specific investment vehicle for investors interested in the play.

SandRidge Mississippian Trust (NYSE: SDT  ) is one of two trusts operated by SandRidge that is focused on a specific geologic region (SandRidge Permian Trust is the other). Because the resources in any given region aren't infinite, the trust won't exist forever. The trust gives the company additional financing to explore and produce in the region and allows unit holders to profit accordingly. And profit they shall!

Production in the Lime for the third quarter of 2011 jumped 50% over the second quarter of this year and a whopping 653% increase over the same time last year. The company drilled 47 wells in the Lime in the third quarter and has drilled 108 there so far this year. It has drilled 147 horizontal wells total in the play, almost half of all the horizontal wells drilled in the Lime so far. The company has also identified 4,000 more drilling locations over its acreage.

Foolish takeaway
The development of the Mississippi Lime is indicative of a trend at large in the oil and gas industry right now. Companies are pulling out of mostly methane plays like the Barnett Shale and moving to oil-and-NGL-rich plays like the Permian Basin and Eagle Ford field instead. If your investments aren't trying to take advantage of these plays, make sure management provides an acceptable reason why. When the price of natural gas begins to rise again, plays like the Barnett will become popular once again, but the immediate future belongs to oil and NGLs.

Looking for another way to play natural gas? Click here to check out the Motley Fool's special free report "One Stock to Own Before Nat Gas Act 2011 Becomes Law."

Fool contributor Aimee Duffy doesn't own shares of the companies mentioned in this article. If you have the energy, check out what she's keeping an eye on by following her on Twitter, where she goes by @TMFDuffy.

The Motley Fool owns shares of Devon Energy. Motley Fool newsletter services have recommended buying shares of Range Resources and Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (8)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 28, 2011, at 7:13 PM, Nawaralsaadi wrote:

    I would add Equal Energy (EQU) to the list, they won 20000 acres in the Mississippian.

  • Report this Comment On November 28, 2011, at 11:12 PM, HWY216 wrote:

    Aimee,

    Very nice article on SD. I have seen Tom Ward on two separate occasions and have come to believe that his assertion of tripleing EBITDA in three years is attainable. Their numbers for Q3 came in very respectable and they are drilling wells at a fast pace in the Mississippian as well as the Permian. Thanks again for your article.

    With a sensible energy policy in this country, we could be energy independent within 5 years.

    Long: SD, PER, SLB & HAL

  • Report this Comment On November 29, 2011, at 1:33 PM, geopressure wrote:

    SIOR is very small penny stock who owns 8230 acres within the play... PetroQuest sold Atinum Capital Partners 13.2% working interest to a portion of their leases for $4,425/acre... This equates to $33,500/acre for 100% working interest... That is like prime Haynesville Shale lease rates... This new transaction makes SIOR's 8230 acres pretty valuable...

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