While the Permian Basin has grabbed the attention of oil companies and their investors in recent years, it's not the only spot where drillers can earn lucrative returns at lower oil prices. In fact, some drillers are finding that the STACK shale play in Oklahoma is just as good, if not better, than the vaunted Permian. That's why they spent billions of dollars to scoop up land in the region over the past few years, which is starting to pay big dividends by fueling remarkable production growth.
The STACK Shale Play 101
The STACK is an acronym for Sooner Trend Anadarko Canadian and Kingfisher. It designates the shale formations (the Sooner Trend, which consists of the Meramec and Woodford shale layers) as well as the location of the Anadarko Basin centered in Canadian and Kingfisher counties of Oklahoma. It's one of two hydrocarbon-rich hot spots in the western part of the state along with the SCOOP, or South Central Oklahoma Oil Province.
While drillers have been developing the Anadarko Basin since the 1930s, industry activity levels started picking up around 2007, when Devon Energy (NYSE:DVN) and Cimarex Energy (NYSE:XEC) completed the first horizontal wells. That said, Newfield Exploration (NYSE: NFX) was the first to discover the STACK, which it unveiled in late 2013 to denote not just the location but the fact that it was "stacked" with several hydrocarbon-rich layers, including the Woodford, Meramec, and Osage. Several other drillers have joined this trio in focusing on the STACK in recent years, including Marathon Oil (NYSE:MRO) and Continental Resources (NYSE:CLR).
STACKing the decks for future growth
Devon Energy currently has the top acreage position in the STACK. While some of that land is from its legacy operations in the region, it significantly bulked up at the end of 2015 by spending $1.9 billion to purchase privately held Felix Energy for its STACK position. As a result of that deal and its leasing efforts, the company controls at least 5,700 drilling locations in the region, with the potential for that number to rise to more than 11,000 in the future. These wells produce high rates of oil and gas, which enable Devon to earn exceptional drilling returns while also delivering needle-moving growth. In fact, Devon's STACK assets are on pace to grow production by more than 35% this year and at least 30% next year.
Newfield Exploration holds one of the largest acreage positions in the Anadarko Basin. The company believes it to be a "world-class" asset because it can earn a more than 40% return on new wells at current oil prices and certain portions of the STACK have the lowest single-well breakeven prices among shale plays at about $25 per barrel. Those high returns helped drive Newfield's output from the Anadarko Basin up 20% in the past quarter alone and should drive healthy production and cash flow growth in the coming years.
Marathon Oil is another big-time player in the STACK. While the company controlled a large legacy position in the Anadarko Basin, it bolstered its STACK land last year after buying private equity-backed PayRock Energy for $888 million. Marathon is still appraising its STACK potential, but the region is a vital component of the company's plans to boost production 10% to 12% annually through 2021. In fact, the high rate of returns Marathon can earn in the STACK is one of the reasons the company expects to support that growth within the cash flows it receives at $50 oil.
While Cimerex was one of the early leaders in using horizontal wells to unlock the resource riches of the Anadarko Basin, its current acreage position doesn't quite stack up with those of rivals, which is why it's focusing more of its attention on the Permian. That said, it still controls a large inventory of high-return wells. Those wells are one reason it's on pace to produce 32% to 37% more oil per day by year-end than it was at the end of 2016.
Continental Resources is one of the largest acreage holders in the Bakken shale. However, it has worked hard to complement that position in recent years by scooping up land in Oklahoma. As a result, it controls acreage in both the STACK and SCOOP plays. That move is paying off since its oil-focused STACK Meramec wells can currently earn a rate of return in excess of 100%. The return-driven growth from those wells has the company on pace to boost output 10% to 12% this year while setting the stage for 15% to 20% production growth in 2018, which the company believes it can achieve while living within cash flow in a $50 to $55 oil price environment.
Just scratching the surface
While drillers have been testing the STACK shale play for several years, they're only just beginning to realize its potential. These oil stocks could boost returns for investors in the coming years as they unleash the power of their STACK positions.