Tom Ward, SandRidge Energy's (NYSE: SD ) founder and former CEO, had high hopes for the Mississippi Lime, a vast limestone formation underlying parts of Oklahoma and Kansas.
As recently as last year, he was quoted as saying that oil production in the Mississippi Lime would surge from around 3.5 million barrels of oil equivalent a month to over 18 million barrels by the end of the decade, rivaling prolific plays such as North Dakota's Bakken.
But today, that looks increasingly unlikely. The rush into Kansas' Mississippi Lime that began three or four years ago has reversed drastically, as company after company has packed up its equipment and personnel in search of more lucrative opportunities elsewhere. Only one major company, SandRidge, plans to stick it out.
An exodus from the Mississippi Lime
The most recent blow came in September when Shell (NYSE: RDS-A ) announced it would exit its entire position in the Mississippian, which included 600,000 net leasehold acres and 45 producing wells. The company simply wasn't generating the kinds of returns it had hoped, for and saw more attractive opportunities elsewhere.
In February, Chesapeake Energy (NYSE: CHK ) , which was also initially bullish about the Mississippian's potential, sold a 50% interest in some 850,000 net acres in the play to China's Sinopec (NYSE: SHI ) for $1 billion in an effort to plug its cash flow shortfall. Then, in August, the company sold its remaining gas gathering and processing assets in the Mississippian to SemGroup (NYSE: SEMG ) for $300 million in cash, marking its full exit from the play.
Encana (NYSE: ECA ) also threw in the towel recently, putting 18,000 net leasehold acres in the Mississippian up for sale in September. The company simply wasn't generating the returns it had hoped for, and is now targeting five other liquids-rich formations, including the Montney and Duvernay shales in Canada, the DJ Basin in Colorado, the San Juan Basin in New Mexico, and the Tuscaloosa Marine Shale in Louisiana and Mississippi, in an effort to diversify away from natural gas.
And Apache (NYSE: APA ) , which eagerly acquired 580,000 leasehold acres in northwestern Kansas and southern Nebraska in June of last year, has also exited its position in the play. The company is now targeting liquids-rich assets in Texas' Permian Basin and Oklahoma's Anadarko Basin, which will be the main drivers of its growth in the years ahead, while its international operations in Egypt and the UK North Sea will serve mainly as cash flow generators.
The ones that stayed
With all these major names out of the picture, only a handful of companies remain. Devon Energy (NYSE: DVN ) , for instance, still has roughly 600,000 net acres in the play, but has stated that it views the Mississippian as more of an "exploration play" and concedes that major uncertainties remain regarding its true potential.
That leaves only SandRidge Energy, which is allocating roughly three-quarters of its total drilling and completion capital expenditures to its 1.9 million net acres in the Mississippian. But SandRidge has a number of advantages in the play that most of the above-mentioned companies didn't have, including a low-cost structure, a vast network of electrical and salt water disposal infrastructure, and a contiguous acreage position.
Furthermore, SandRidge's acreage features something called "stacked pay potential," referring to multiple pay zones within a single formation, which could boost the resource potential of the company's acreage significantly. Thanks to these crucial advantages, SandRidge is able to generate an internal rate of return of approximately 45% on its Mississippian wells.
The bottom line
While this year has seen a mass exodus of energy producers from Kansas' Mississippi Lime play, SandRidge remains undeterred. Next year, the company plans to spend $350 million to drill another 100 horizontal wells across its six core focus areas, which combined cover an area of about 615,000 net acres and feature 3,000 potential net drilling locations.
Importantly, these focus areas have already been derisked, which means drilling should be relatively low-risk and repeatable. With its extensive knowledge of the play's geology, an established infrastructure network, and the lowest cost structure in the play, SandRidge just might have what it takes to fully exploit the Mississippi Lime's potential.
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