In the oil and gas industry, net pay is more than what is in a paycheck. It's the term used to describe an area of reservoir rocks that has commercially producible hydrocarbons. The more pay that's discovered, the bigger the payday down the road for all involved.
For SandRidge Energy (UNKNOWN:SD.DL), that pay has come from the Mississippi Lime formation. However, the company has really only been scratching the surface of that play. It turns out the company is quite possibly sitting on more areas of pay than previously thought.
SandRidge is now exploring the other zones in and around the part of the Mississippian that it has primarily been targeting. The initial tests of those additional zones have produced some really encouraging results. This stacked pay potential actually encompasses up to five zones in total over much of SandRidge's acreage. That could materially increase the resource potential, meaning that the acreage the company holds could be much more valuable.
In the slide below from a recent investor presentation, SandRidge lays out the advantages of having these stacked pay zones as well as its current development plans. It also has a nice schematic to visually show what this looks like.
There are a couple of items investors should take note of. First, the initial results of the Middle Mississippian wells are nearly double the company's current overall initial production rate average of 377 barrels of oil equivalent per day. Further, the real game changer is that SandRidge could drill these wells while utilizing its existing infrastructure, which would really improve overall returns.
That means that SandRidge's infrastructure is even more of a competitive advantage when adding in its stacked pay potential. It would yield an even greater rate of return for the $140 million invested in electrical infrastructure as well as the $530 million invested to drill salt water disposal wells. Bottom line here, if SandRidge can prove the potential of these additional zones it will add significant value to the company.
One area to watch closely is the Woodford. SandRidge just launched a test program this quarter on the Woodford, which is thought to be the Mississippian's source rock, or the area which under the right conditions can generate hydrocarbons. SandRidge is actually working with Devon Energy (NYSE:DVN), which already has had a lot of success unlocking the Woodford. In fact, some of its more recent wells have produced up to 1,500 barrels of oil equivalent per day. If SandRidge finds anything near those production numbers from its Woodford acreage it would be a big future value creator for the company.
Stacked pay, when combined with multi-well pad efficiencies really can be a financial game-changer for the industry and its investors. One area where stacked pay is really starting to bear fruit is in the Bakken. Leading driller Continental Resources (NYSE:CLR) is also leading in the development of the Three Forks formation, which has multiple pay zones below the Bakken. Unlocking these additional zones is adding tremendous unbooked net resource potential for the company. In fact, Continental thinks there is just as much oil in the Three Forks as there is in the Bakken, which is an absolutely remarkable number.
Similar potential could be waiting for SandRidge to unlock. Add it all up and there is potential for significant future pay day for SandRidge investors as it unlocks more oil and gas from just inside its own core acreage position.