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Oklahoma's SCOOP/STACK shale shaping up as raging party with short guest list

While the unconventional windows of the Permian Basin continue to draw the world's attention and large amounts of capital, another impressive play a few hundred miles to the north and east is shaping up to be a rival.

The liquids-rich SCOOP/STACK play in central Oklahoma has become one of the most affordable unconventional formations in the country, and a few companies, including Devon Energy Corp., are banking on it becoming as lucrative as the Permian without much fear of being crowded out of their positions.

Devon got into the STACK area of the Anadarko Basin in 2008 and quickly assembled 112,000 net acres. Despite small production numbers in those days, the company recognized vast potential from the play, saying in 2009 that "net risked resource potential in the Cana play represents nearly four trillion cubic feet of natural gas equivalent."

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Devon now refers to the STACK as a "franchise growth asset," saying in an investor presentation released June 7 that it now holds 625,000 net acres in the area and 5,400 risked locations. Along with the Delaware Basin in the Permian, the STACK has become the company's biggest target for exploration and production capital.

"In the Oklahoma STACK play, our capital activity also delivered outstanding well productivity. ... The [39-well] Hobson Row is one of the key drivers of our STACK growth plans in 2017, and gross production remains on pace to exceed 40,000 [barrels of oil equivalent] per day by the end of the second quarter," CEO David Hager said during the company's first-quarter 2017 earnings call.

Located in the already well-known Anadarko Basin, the SCOOP, or South Central Oklahoma Oil Province, and STACK, or Sooner Trend, Anadarko, Canadian and Kingfisher, combine to cover all or part of 11 Oklahoma counties. They share a large portion of acreage with the Cana-Woodford Shale play, meaning drilling activity has been going on in the area for some time. Still, it was not until 2008 that Devon hit on what it then called the "Cana," now known as the STACK.

The SCOOP would not be delineated until 2012 when Continental Resources Inc. began to expand from acreage it already held in the region. That company now holds nearly 200,000 net acres in the area and continues to expand its production. The driller reported 62,178 boe/d, 27% oil, from the play in the first quarter, representing 29% of total company output.

'The appeal is very strong'

The SCOOP/STACK is still in its infancy compared to other plays, but the infrastructure in the region, with more coming online, and relatively easy rock to drill through has already made it one of the most affordable unconventional plays in the U.S.

"The appeal is very strong," Morningstar Analyst David Meats said. "It has fewer players but very impressive economics for the most part, despite the high cost of development since it is deeper than some of the other basins. And since it's an emerging area, there's more scope for upside from efficiency gains and switching to factory drilling, whereas the low-hanging fruit is gone from more mature plays."

Raymond James analyst Pavel Molchanov said producers in the SCOOP/STACK would be able to make money even in a lower oil and gas price environment than the current one. "Break-evens here are the second-best, behind the Permian, around $40/bbl," he said. "One of the factors that helps is price realizations, because the Cushing hub is located in Oklahoma, right in the neighborhood."

Williams Capital Group analyst Gabriele Sorbara said there is still an opportunity for break-even prices in the SCOOP/STACK to drop further. "The Permian has better economics, but the Anadarko Basin is quickly approaching it," he said. "There's probably more gas coming out of the Anadarko."

Exclusive party?

The break-even price is not a concern with the SCOOP/STACK. There are, however, a few major questions, including the exact size of the play and whether there is any quality acreage for new operators to buy in.

"My guess would be to classify it as 'smaller, but significant,'" Morningstar's Meats said.

Molchanov said the play would not fall into the same category of either Midland or Delaware basins in the Permian or the Eagle Ford Shale of southwest Texas. "It's geographically less extensive than the Permian or Eagle Ford, so in absolute terms of barrels per day, it certainly would not be as large," he said. "But the wells individually are quite impressive."

The smaller area of the SCOOP/STACK, along with the past history of exploration in the Anadarko Basin, has allowed a handful of companies to become dominant players in the area. Devon and Continental remain powers in the formations, along with Marathon Oil Co. and Newfield Exploration Co. Not surprisingly, those companies are far from interested in selling their stakes.

"The area is a lot smaller than the Permian, and most of the land is locked up," Sorbara said. "There just aren't any sexy packages on the M&A market. If anyone wants to come in, they're going to have to buy ... one of those companies outright."