Most energy investors have probably heard of Texas' Eagle Ford and North Dakota's Bakken, the two fastest-growing shale plays in the country. But few have probably heard of the Uinta basin, a hydrocarbon-rich resource play in northeastern Utah.
While the Uinta can't compete with the Bakken or the Eagle Ford in terms of growth expectations, the play offers solid economics for well-positioned companies. It also doesn't yield light oil like the Eagle Ford or Bakken, but rather produces a heavy, waxy crude. Due to a combination of Uinta crude's unique traits, such as its high paraffin content, and limited transportation and refining capacity outside of Utah, most of it ends up in refineries in Salt Lake City.
But for companies that have secured long-term contracts to supply these refineries, the Uinta could be a nice source of steady profits. With that said, let's take a closer look at two companies to watch in this under-the-radar play.
The first company to watch is Newfield Exploration (NYSE:NFX), which owns interests in roughly 225,000 net acres in the Uinta Basin and is currently the largest oil producer in Utah, accounting for roughly 30% of the state's oil production.
The company has grown its Uinta production from 7,000 barrels of oil equivalent per day in 2004 to roughly 23,100 barrels of oil equivalent per day as of the third quarter of this year. Importantly, Newfield has already secured two separate agreements to supply crude oil from its Uinta operations to two major Salt Lake City refineries operated by Tesoro (NYSE:TSO) and HollyFrontier (NYSE:HFC).
In late 2011, it inked a seven-year agreement to supply 18,000 barrels of crude per day to Tesoro's 60,000 barrel per day Salt Lake City refinery starting in 2013. Next, in January 2012, it signed a 10-year supply agreement with HollyFrontier to supply 20,000 barrels per day of black and yellow wax crude oil to HollyFrontier's Woods Cross refinery, which is currently undergoing an expansion that will enable it to process 45,000 barrels per day by late 2014, up from 31,000 barrels currently.
Newfield is allocating roughly 25% of its estimated 2014 capital budget of $1.6 billion toward its operations in the Uinta basin. With three to five operated rigs in the basin, it expects production next year to grow by 5% to 8.6 MMBOE. But production growth could be affected by refinery interruptions that would likely cause the company to divert capital away from the Uinta toward plays that provide higher and more certain returns, such as its Anadarko Basin, SCOOP, and STACK drilling programs.
The second company to keep a close eye on in the Uinta basin is Ultra Petroleum (NASDAQOTH:UPLMQ), which recently acquired roughly 8,200 acres of oil-producing assets in the basin for $650 million. For a company that is predominantly a natural-gas producer, with gas accounting for 96% of its proved reserves as of year-end 2012, the decision was a big move.
In addition to diversification benefits, the Uinta acquisition appears positive given the assets' strong expected returns and relatively low costs of development. Assuming well costs of around $1.5 million per well, Ultra estimates that its Uinta assets will generate an internal rate of return in excess of 100% at current strip-oil pricing.
Not only is the Uinta asset expected to be cash-flow positive starting next year, but it's also expected to completely pay for itself within five years. Further, Ultra expects to be able to leverage knowledge gained from drilling in its Pinedale field in Wyoming to optimize its drilling program in the Uinta, since the two fields share similar geological traits.
Given the solid economics of Ultra's newly acquired Uinta assets and the company's success in fields with similar geological characteristics, investors should keep a close eye on the company's results in the basin over the next few quarters. If Ultra is able to grow Uinta production at a targeted compounded annual growth rate of 50% over the next four years, it should be able to generate massive amounts of cash flow while expending relatively little capital.
Fool contributor Arjun Sreekumar owns shares of Ultra Petroleum. The Motley Fool recommends Ultra Petroleum. The Motley Fool owns shares of Ultra Petroleum and has the following options: long January 2014 $30 calls on Ultra Petroleum, long January 2014 $40 calls on Ultra Petroleum, and long January 2014 $50 calls on Ultra Petroleum. 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.