3 Niche Operators in an Off-the-Radar Oil Play

The Uinta lies off the beaten path. It's an interesting basin that's provided a nice niche for its relatively few operators, but it's not without its challenges. Unique crude characteristics limit pricing and provide midstream challenges. Despite that, the basin shows promise for those operators willing to accept the challenge. Newfield Exploration (NYSE: NFX  ) , Bill Barrett Corporation (NYSE: BBG  ) and LINN Energy's (NASDAQ: LINE  ) unit Berry Petroleum lead the charge in rejuvenating this marginalized basin.

The Uinta Basin of northeast Utah is one of the more interesting off-the-radar basins in the U.S. While the basin has produced since the 1950s, much of its crude is only used regionally, hurting margins relative to other higher-profile plays. That's changing slowly due to the adoption of unconventional technologies in the basin and infrastructure improvements.

Life in the backwater
For much of the first half of the naughts, the basin was largely an afterthought. Production was generally limited to two large but waning legacy fields in Brundage Canyon and Monument Butte. Efforts by the state of Utah and the Ute Nation succeeded in recruiting the interest of a few independents, most notably Berry Petroleum and Bill Barrett.

The two tag-teamed operations, proving out lower sections of the Green River Formation and upper Wasatch, the two intervals dominating drilling activity today. The two were joined shortly after by Newfield Exploration after its acquisition of Inland Resources' Greater Monument Butte field in 2004. While most of the standard suspects hold Uinta acreage, the three largely dominate the basin.

While Berry's production was substantial early due to its Brundage Canyon acquisition, it's the JV with Bill Barrett that spearheaded much of the basin's current momentum. Historically, Bill Barrett has been a natural gas oriented producer with much of its operations in the Piceance Basin, cross-border in Colorado. In contrast, Berry has always been liquids oriented. The two teamed up to de-risk a large block of acreage west of Berry's Brundage Canyon field.

Berry drilled objectives in the liquids-rich Green River formation, while Bill Barrett targeted deeper gas-rich Mesaverde and Wasatch intervals. Each partner earned a majority interest in its respective project, with the Ute Nation holding 25% interest on all wells spud. Spreading the cost between the two companies effectively de-risked the acreage, rejuvenating the basin while spreading risk.

A shift toward liquids
As gas fell, Bill Barrett cast off substantial natural gas reserves and both operators now focus on oil-rich sections in the basin. The shift has proven lucrative. Barrett's Uinta oil production popped 90% year over year in 2013, after the company poured 45% of its total capex into the basin.

While Berry's 44% year-over-year Uinta liquids production growth lags Barrett's, that's off the high base of its Brundage Canyon field. Berry also has more irons in the fire, with California and the Permian competing for liquids capex. Still, total Uinta production averaged 8 MBOEd (thousand barrels of oil equivalent per day) in Q3 of 2013, providing 19% of total production and qualifying it as one of three critical basins for Berry, leading into its merger with LinnCo (NASDAQ: LNCO  ) and LINN Energy.

New fields abound?
Even with the success of Berry and Bill Barrett, the central player in the Uinta is really Utah's largest producer, Newfield Exploration. It produces almost a third of the state's total volume. The Uinta is one of four focus areas Newfield adopted to revitalize growth. It's home to roughly a third of Newfield's entire proved reserve base.

Prior to Newfield's entry, most Uinta wells were vertical, co-completing the lower Green River Formation and upper Wasatch. Newfield's focus is horizontal whenever possible. It's had great success running ultra-long laterals in the Uteland Butte interval of the GRF, cranking production up to 23.1 MBOEd in Q3 from 2004 levels of 7 MBOEd. It's now turning its horizontal focus to the Wasatch in an attempt to scale production further.

The Wasatch is particularly interesting given its size. It's a much thicker prospective zone reaching 1,400 feet in total thickness. Newfield is experimenting with stacked laterals to optimize well count and boost production. It will be interesting to see how much production boost it gets from its ongoing horizontal efforts.

This little basin has one strange little problem
The basin is home to some of the strangest crude you'll ever run across. Due to a high content of extremely long chain alkanes, oil from the Uinta is a solid at ambient temperature. Not only do these black and yellow waxes provide obvious refining challenges, but dilution strategies commonly used in oil sands production are completely ineffective. The only solution is low-tech: Keep the wax melted.

While this simple solution is effective, it limits facilities that can accommodate the wax the distance it can ship. It also boosts lease operating expense. As a result, Uinta crude is typically only refined locally and Newfield's push is stretching that capacity. Fortunately, Salt Lake refiners are adding capacity and shipping by insulated railcar is opening up some new markets for the basin.

A promising basin with unique challenges
The same unconventional production techniques that unlocked the Bakken and Eagle Ford are rejuvenating this old gas basin. There's a lot of potential, highlighted clearly by Newfield's impressive production gains. Unfortunately, the region's quirky oil and its takeaway issues cramp price spreads relative to other plays. With new refining capacity coming on-line and increased use of rail, the situation seems poised for improvement. With limited competition and much of the basin's acreage tied up, the Uinta may prove a valuable niche for the few operators that participate in this off-the-radar basin.

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