<<Read Part 1: Bakken Update: How To Invest In The Delaware Basin

The Delaware Basin continues to be one of the best areas in the US to play unconventional oil production.In the first part of this series, we provided some operators with acreage in the northern and southern plays. There are a large number of operators in this basin, but only a small number are levered to these counties. Operators like Apache (APA) and Occidental (OXY) are the leading producers but only pledge a smaller percentage of cap ex to the play. Others like Matador (MTDR) and Concho (CXO) are more levered and should trade at an EV/EBITDA that is in line with Permian producers. The Permian has three separate, main areas. The Delaware is farthest to the west, while the central platform is in the middle. The Midland Basin is further to the east. Although all are valuable, the Delaware may have more upside. It has seen less traffic and this means there is more de-risking to be done. We are still unsure as to the extent of the play and how many intervals are economic. As operators continue to increase production, we should have a better idea how large the play can become.

Every investment bank has differing opinions as to which plays have the best breakeven prices. Raymond James believes that the Midland Basin is better but still has the Delaware’s Wolfcamp as the third best. The Delaware Bone Spring is also quite good. Its breakeven is below $40/bbl. It is better than areas like the Bakken core, which produces some of the biggest wells in the country. The secret seems to be a very slow decline rate. While other wells decline faster, the Delaware and Midland Basins continue to show us it is better over the long haul. This is due to the source rock’s ability to be stimulated better than those in other basins. 

We covered several names in part one, including EOG Resources (EOG), Devon (DVN), Apache (APA), Occidental (OXY), Matador (MTDR) and Concho (CXO). Cimarex (XEC) is levered very well to the Delaware.It is also STACK/SCOOP focused, so it is not a pure-play. It will spend approximately 60% of its 2016 cap ex in the Delaware Basin’s Wolfcamp and Bone Spring. Almost 50% of total cap ex is Wolfcamp focused.It is finding enhanced completions or Mega-Fracs are working well. It now uses 2,500 lbs. of sand per foot on its Delaware laterals. 

(Source: Cimarex)

It has 230K net acres prospective the Wolfcamp.It has more acreage to the north, and this prospect at least has Bone Spring upside. Cimarex is more focused to the west. Since it is a more gas focused company, this leasehold provides more upside to that specific resource. Cimarex has a couple of main core areas. The Culberson/Eddy, Reeves and Ward county prospects have acreage that is in close proximity making the acreage cheaper to develop. 

Parsley Energy (PE) has approximately 30K acres in the Delaware Basin. Since this acquisition, the market has rewarded Parsley with a higher valuation.

(Source: Parsley)

Much of this is in northeastern Reeves and northwestern Pecos counties. Although this is pushing the extent of the Basin, the geology is interesting.The intervals are deep. In both Risked Trees Ranch and its most recent acquisition the Wolfcamp thickens significantly.Looking at just the Bone Spring and Wolfcamp, these pay zones are up to 4,200 feet. There is additional upside to the Pennsylvanian, Mississippian, and Woodford intervals as well. These are confirmed producers, but need to be de-risked.This could provide significant upside or downside depending on results.This is a Permian pure-play, but keep in mind it is much more levered to the Midland Basin.Its Midland leasehold covers 80,000 acres.

Resolute (REN) changed its entire focus when it bought into the Delaware. This was an important move, as its EOR play probably does not have the economics to survive lower oil prices. It has 12,900 net acres in the Delaware. This is focused on Reeves County. 

(Source: Resolute)

This acreage is in the gas-prone Wolfcamp, which is producing some relatively large EURs. Higher percentages of natural gas increase well pressures. This pushes more resource up and out of the well bore. It also provides higher EURs, so sometimes this number can be a bit deceptive. Resolute’s curve has and EUR of 2,300 MBOE. It is already using 10,000 foot laterals and has done better than most had expected. This is the reason for the recent run up in valuation. 

(Source: Resolute)

Well economics are extraordinary, as we have seen from other operators in the area. These are the types of wells that could keep oil prices lower for longer. The biggest positive for the Delaware Basin is the over 4,000 feet of pay zone. This compares to just a few hundred feet in the best areas of North Dakota. If we just look at the Wolfcamp, we get an idea of why small leaseholds command such a large price per acre.

(Source: Resolute)

The downspacing is significant.43 locations per section are currently possible if the lower Wolfcamp intervals go as planned. Given the decreased traffic in Reeves, we think that more than 43 locations per section could be achieved. 

Diamondback (FANG) is another Midland player to acquire Delaware Basin acreage. It has 86,000 net acres in that basin. It recently bought a little over 19,000 net acres in the Delaware, near Parsley’s leasehold. 

(Source: Diamondback)

Early well results from operators like Anadarko (APC), Concho (CXO) and Apache (APA) have been very good. The pay zone is a little deeper than in its Midland County acreage, but it is possible the rock quality in eastern Reeves is as good if not better. Three zones are already de-risked. This includes the 3^rd Bone Spring, Wolfcamp B and Wolfcamp A. This should provide an excellent area for pad development.

(Source: Diamondback)

The above slide provides why operators have interest in this area. There have been some very good IP90s as seen by the dark red on the left side. It is also on the oil-prone side of the Delaware, so these very good 90 day rates are not inflated by increased percentages of natural gas. Operators are seeing large percentages of oil varying from 69% to 89%. 

(Source: Diamondback)

Reeves County is second only to Midland in horizontal rig count. The ramp up to get acreage held by production continues, and we expect it will continue. The Wolfcamp in the northern Delaware is better than in the south, but both areas are still good. The southern Bone Spring is exceptional, but keep in mind, these numbers can vary a great deal depending on who is doing the research.

(Source: Diamondback)

Although operators have not been as active as those in Midland, we are beginning to get a feel as to how this play works. Reeves has a large number of operators working the 3^rd Bone Spring, Wolfcamp A and B. Ward County is seeing much of the same, but no work has been done in the Wolfcamp C or D. The northern Delaware has locations in all of the source rock listed. 

In summary, there is still tremendous upside to the Delaware Basin. Some Midland operators have made acquisitions to get in the Delaware. Although acreage costs are lower, the source rock is as good if not better. Since there is still room for upside, the Delaware names may still have value. I will continue coverage of Delaware names in part 3.