One of the greatest things about the U.S. shale boom is how quickly some shale formations have progressed to become world-class oil and gas plays, thanks to the application of advanced drilling technologies.
One play that exemplifies this is the Spraberry/Wolfcamp, a shale formation located in Texas' Permian-Delaware basin that could be the second-largest oilfield in the world, behind only Saudi Arabia's Ghawar field. Let's take a closer look at this emerging shale play's resource potential and three companies betting on it.
Primer on the Spraberry/Wolfcamp
The Wolfcamp formation has been around for a long, long time. Ever since oil and gas development in the Permian Basin began back in the 1920s, companies have been drilling in the play. But until recently, it was viewed as a largely unproductive shale with limited resource potential.
Fast-forward to today, however, and a host of companies are growing increasingly bullish about its potential. According to Scott Sheffield, CEO of Pioneer Natural Resources (NYSE:PXD), the Spraberry/Wolfcamp shale is the largest oilfield in the U.S., with an estimated resource potential of roughly 50 billion barrels of oil equivalent, which dwarfs both the Bakken and the Eagle Ford.
The play is so lucrative because of its various geological zones -- including main zones Wolfcamp A, B, C, and D -- that are each thousands of feet deep and contain massive quantities of oil. In addition to horizontal drilling, companies are using stacked laterals and drilling multiple wells from an individual pad to different depths within the formation to boost recovery rates.
Pioneer Natural Resources
Pioneer is the dominant player in the Wolfcamp/Spraberry, commanding roughly 625,000 net acres across the northern Spraberry/Wolfcamp and the southern Wolfcamp area in the Midland Basin. It recently drilled a Wolfcamp D horizontal well that yielded 24-hour peak initial production of 3,605 barrels of oil equivalent per day -- the highest for any Spraberry/Wolfcamp interval to date.
That well doesn't appear to be a total outlier, either, with several of the company's horizontal wells in the Wolfcamp A and B expected to have estimated ultimate recoveries (EURs) in excess of 800 MBOE. This is important because the higher Pioneer's EURs are, the better its returns. For instance, the company estimates it will earn a whopping 125% pre-tax internal rate of return (IRR) on wells with EURs of 800 MBOE, as compared to a 60% return on wells with EURs of 650 MBOE.
With decades of drilling inventory remaining in the Wolfcamp/Spraberry and with most of its acreage held by production, Pioneer should continue to deliver high-margin, double-digit production growth from the play for the foreseeable future. Investors should keep a close eye on the results of its horizontal drilling program in the Wolfcamp over coming quarters.
Anadarko (NYSE:APC) is another company with high hopes for the Wolfcamp. The company has a solid foothold in various onshore U.S. plays, which represent nearly 90% of its total production and account for roughly 60% of its capital spending. Though its main drivers of growth are established plays like Colorado's Wattenberg field and Texas' Eagle Ford, Anadarko has also amassed some high-quality acreage in the Wolfcamp that could pay off handsomely in the future.
Third-quarter results were encouraging, with the company's six Wolfcamp wells yielding gross processed IP rates of 1000 to 1600 BOE per day and a high oil cut of roughly 70%. The company currently has six rigs operating in the play, as compared to zero a year ago, and is meticulously evaluating the play's aerial and vertical extent. Within a few months, it should have a much better understanding of the resource potential of its acreage.
Last but not least is Devon Energy (NYSE:DVN), which commands a truly dominant position in the Permian Basin with roughly 1.3 million net acres. Though the company's 2013 drilling program in the basin concentrated mainly on low-risk opportunities such as Bone Springs, Devon has also been targeting the Wolfcamp, where it continues to bring new wells online and de-risk newer acreage.
During the third quarter, its new horizontal Wolfcamp wells posted average 30-day IP rates of 400 barrels of oil equivalent per day, with a high oil cut of roughly 75%. Returns also improved, as average well costs fell 10% below Devon's tight well to $5.5 million. With approximately 800 remaining drilling locations in the Wolfcamp, investors should pay close attention to Devon's results in this promising play.
Fool contributor Arjun Sreekumar owns shares of Devon Energy. The Motley Fool owns shares of Devon Energy. 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.