Great article Paul. Plenty of positives to offsetsome negatives.
Important to note that "rather than an issue with geology, the strugglesof STACK-focused Alta Mesa Resources have been primarily due to mismanagementand a lack of operational execution" so despite using Alta Mesa as anegative reference in the article, it may be Alta Mesa's own doing rather thanthe STACK itself.
As per Seeking Alpha article below:
https://seekingalpha.com/article/4270025-scoop-oklahoma-stackingSummary:
The broad decline in the rig count in Oklahoma over the last year has likelyreflected oil price volatility as well as increased drilling efficiencies. Thetrend in recent months for the SCOOP and STACK has been bifurcated, with the SCOOP’s rig count gaining and theSTACK’s falling.
Despite headlines that may be perceived negatively, many E&Ps continue toreport positive results from both the SCOOP and STACK.
Rather than an issue with geology, the struggles of STACK-focused Alta MesaResources have been primarily due to mismanagement and a lack of operationalexecution.
We interrupt your regularly scheduled Permian update to focus on Oklahoma thisweek. While easily overlooked by the casual observer, upstream and midstreamoperators in the SCOOP (South Central Oklahoma Oil Province) and particularlythe STACK (Sooner Trend Anadarko Canadian and Kingfisher counties) have madewaves recently. EnLink Midstream (NYSE:ENLC) lowering volumeguidance in the STACK, relative strength in the SCOOP, shifts in activity, andthe struggles of STACK-focused Alta Mesa Resources(NASDAQ:AMR) have generatedbuzz around Oklahoma. Today, we'll look at current trends in the SCOOP/STACK,analyze producer activity for a potential slowdown in the region, and discussthe impact on midstream companies.
Before diving in, it's important to note that the SCOOP/STACK are in earlierdevelopment stages than more mature plays like the Permian. This meansproducers are still working to appraise their acreage and optimize drilling.Additionally, in a volatile oil price environment, producers are likely toshift resources to more developed plays that may offer higher returns. Thesefactors can contribute to near-term noise around the SCOOP/STACK apart from thelong-term outlook for the play.
Oklahoma has attracted interestfrom E&Ps and midstream providers.
The SCOOPand STACK plays in Oklahoma have been attractive to producers over the past fewyears given their relatively low acreage cost (compared to the Permian) andproximity to the Cushing oil hub. While the SCOOP, STACK, and MERGE, which isthe area between the STACK and SCOOP that includes portions of Grady, Caddo,and Canadian counties, represent a relatively small geographic area of Oklahoma(see map below), they have driven a steady climb in oil andgas production in the Anadarko Basin.1 Canadian E&P Encana(NYSE:ECA) cited the quality of Newfield Exploration's large position in theSCOOP/STACK when acquiring the company earlier this year. Producerinterest and activity in the state has also driven midstream interest. InOctober 2018, Enable Midstream (NYSE:ENBL) announced thatit was expanding its Oklahoma crude footprint with the acquisition of VelocityHoldings. The acquisition increased the company's crude gathering andtransportation capabilities in the SCOOP and MERGE plays, enhancing its abilityto capitalize on changing upstream activity as discussed below.
SCOOP/STACK rig counts are downyear-over-year, but the SCOOP has seen gains in recent months.
Rig activity across the SCOOP and STACK has declined on a year-over-year basis,which is likely the result of both oil price weakness in 4Q18 and increaseddrilling efficiencies. According to Baker Hughes, the rig count2 for theSCOOP and STACK declined ~40% from 76 to 45 rigs year-over-year as ofMay 31. This drop coincides with a less than 10% decline for the overall USland rig count and declines in the Permian and Eagle Ford of ~5-6% over thesame time period. The earlier development stage of the SCOOP/STACK maycontribute to the larger decline in rig count. Amid oil price volatility,producers are likely to focus their resources on less prospective plays likethe Permian where there is less guess work and likely stronger returns.Notably, the rig count trend for the SCOOP/STACK in the last two months hasbeen bifurcated. Since the end of March 2019, the SCOOP has gained five rigs,while the STACK has lost eight rigs.
Given the volatility of oil prices recently, E&Ps have focused on drillingin quality areas and improving efficiency by boosting production per rig,lowering well costs, and improving cycle times. In other words, producers aredoing more with fewer rigs. E&P ContinentalResources (NYSE:CLR) reported in April that oil productiongrowth from its SpringBoard project, a major drilling initiative in the SCOOP,has exceeded expectations and is achieving its 2019 objectives with 25% fewerrigs. CLR announced sequential growth in SCOOP production in 1Q19,even as production fell slightly in the STACK. Encana saidit would cutfrom ten rigs in the STACK in 4Q18 to four over the course of 2Q19 but has alsodetailed strong production numbers recently. In an interim operations updatereleased on June 10, ECA reported quarter-to-date crude andcondensate production in the Anadarko Basin that represented nearly 20% proforma growth from the 1Q19 average, which was driven by strong performance fromnew wells in the STACK. Another large player in Oklahoma, MarathonOil (NYSE:MRO) cited strong results from infill drilling3 in theSTACK in 1Q19 as the company continues to optimize spacing betweenwells.
Devon Energy (NYSEVN), ENLC's largest E&P customer and formerparent, is maintaining operation of five rigs in the STACK in 1Q19 afterdropping from eight rigs to five sequentially in 4Q18. DVN's 1Q19volumes were better than expected despite bad weather, and the companynoted STACK well results that exceeded expectations. However, DVN's managementsaid on the 1Q19 callthat it would drop a frac crew in the STACK in 2H19and that reducing investment in the STACK would be the first lever to pull ifneeded to stay within its capital budget. In other words, DVN would prioritizeother plays over the STACK if necessary.
From a midstream perspective, ENBL and ONEOK (NYSE:OKE) noted thatthey are seeing activity shift from the STACK to the SCOOP to target moreliquids-rich areas during their respective 1Q19 earnings calls, which isconsistent with the rig count trends discussed above. ENLCsimilarly indicated on its 1Q19 call that some of the rig countreduction in Oklahoma is the result of improved drilling efficiencies relatedto the use of multi-well pads and smaller focus areas.
Oklahoma volume growth has been slowing, but is it an issue for midstream?
Accordingto the Energy Information Administration, May 2019 oil and gas productionfrom the Anadarko Basin is expected to be up ~9% from May 2018. However,production has been declining in recent months from prior highs. With the rigcount falling and production slipping modestly, investors are likely trying todecipher the implications for midstream. ENLC describes itself as havingthe largest integrated midstream business in the three core STACK counties -Blaine, Kingfisher, and Canadian. The company attracted attention whenit lowered its full-year 2019 growth rate for natural gas gatheringand processing volumes in Oklahoma to 10-15% with its 1Q19 earnings releaseafter previously guiding to 29% growth at the midpoint. While growthis now expected to be more moderate than before, double-digit volume growth isstill healthy. Looking out further, ENLC management remainsconfident in STACK volumes increasing over the long term.
In a similar vein to ENLC, OKE operates natural gas and NGL-focused midstreamassets in the Anadarko Basin. On its 1Q19 earnings call, OKE reaffirmedits guidance for 2% year-over-year volume growth in the SCOOP/STACK and saidproducer activity in the area is in line with expectations. Despite the overalldecline in rig count, ENBL's dedicated rig count in the SCOOP/STACKincreased from 35 rigs in 3Q18 (first quarter with Velocity's assets) to 38rigs in 1Q19. While the STACK has likely been more challenged than the oilierSCOOP, it's important to note that many midstream operators in Oklahoma haveleverage to both plays. Of course, even more broadly, ENBL, OKE, and ENLC havediversified asset footprints and are not solely dependent on Oklahoma activity.
Alta Mesa Resources' struggles add to noise in the region.
Some of thenoise around Oklahoma has been compounded by the recent struggles of AltaMesa Resources, a STACK-focused E&P with supporting midstream assets thatbegan trading in February 2018. Citing attractive well economics and therelatively cheap cost of acreage, Alta Mesa bet big on drilling inthe STACK. In recent quarters, AMR has reduced its estimates for averagewell production, daily production, and pipeline volumes. This year, the companyhas written down assets by $3.1 billion, laid off nearly a third of itsemployees, and is being investigated by the SEC for potential frauddue to reporting errors. AMR's missed targets and lowered guidance are largelythe result of numerous missteps by management and high spending rather than asignificant geological issue in Oklahoma. Fortunately, AMR's problems do nothave much direct read-through for E&Ps and midstream companies in the region.
BottomLineHeadlines around the SCOOP and STACK may be easily interpreted by midstream investors as cause for concern, but these likely read more negatively than the reality. For example, increased drilling efficiencies and a shift to the SCOOP from the STACK soften the implications of the notable decline in the rig count over the last year. Many E&Ps continue to report positive results from both the SCOOP and STACK. Undoubtedly, the SCOOP/STACK have more variability and are in earlier stages of development compared to more mature plays like the Permian, and therefore, news flow will likely continue to be mixed. For midstream investors, there is little cause for concern given diversified asset footprints, rising activity in the SCOOP, and continued E&P optimization across both plays, allowing more to be done with fewer rigs.
All in all, it seems that SCOOP is starting to gain a lot more interest vs STACK as of late which is great news for BRK. No doubt targeting SCOOP for our main AOI was no mistake.
Looking forward to the results from Jewell.
