Lisa Springer, CFA, Equity research analyst
Energy stocks in this article: Devon Energy ( NYSE:DVN), Chesapeake ( NYSE:CHK), Sandridge ( NYSE:SD), ExxonMobil (NYSE:XOM), Newfield Exploration (NYSE:NFX) and American Petro-Hunter (OTCBB: AAPH)
Independent oil and gas companies are leading the effort to develop America's vast untapped energy reserves. It may surprise many Americans to learn that the US has immense undeveloped oil and gas resources in the Lower 48 states. A large portion of these reserves consists of oil and gas trapped in shale bedrock. Once thought unreachable, recently introduced drilling technologies have enabled the development of shale oil. Hydraulic fracturing is the technique used to release this trapped oil and gas. Wide-scale use of this technology was the main reason for a 35% surge in US gas reserves, according to a mid-year 2009 report by the Potential Gas Committee. This increase was the largest in the 44 year history of the committee. US shale gas reserves are estimated at 616 trillion cubic feet, or a third of total reserves.
Domestic shale energy plays have become so numerous that it is difficult to think of them as unconventional these days. Shale formations such as the Bakken, Fayetteville, Marcellus, Barnett and others have become household name in the oil and gas industry.
Another very active, but until recently little publicized shale play is the Woodford Shale, located in Oklahoma. The shale is found at depths from 7,500 to 8,500 feet, and is generally 50 to 300 feet thick. Drilling activity in the Woodford Shale has skyrocketed since Devon Energy drilled its first wells in 2005. Since then, many large independents have acquired acreage and launched drilling programs. Among the most active operators are Chesapeake (NYSE:CHK), Newfield Exploration (NYSE:NFX) and XTO Energy, which was recently acquired by ExxonMobil (NYSE:XOM). The Woodford Shale is estimated to contain approximately 4 trillion cubic feet of natural gas.
The Woodford Shale is a low-permeability reservoir that must be drilled via hydraulic fracturing to obtain commercial quantities of oil and gas. Early completions were from existing vertical wells that initially targeted deeper horizons. Today, the main exploitation of the Woodford Shale is from long horizontal wells, with some extending laterally more than 4,000 feet.
Partly because of the Woodford Shale, Oklahoma has emerged as one of the Lower 48's biggest producers, ranking second nationwide in gas production and fifth in oil production. Oklahoma has some 90,000 wells and is home to major independent producers like Devon Energy (NYSE:DVN), Chesapeake (NYSE:CHK) and Sandridge (NYSE:SD).
Junior exploration and production company American Petro-Hunter (OTCBB: AAPH) has acquired interests in seven northern Oklahoma lease blocks targeting shale targets, including the Woodford Shale. At present, American Petro-Hunter is drilling shallow, vertical wells, which it plans to put to pump immediately. In the future, the Company plans to drill horizontal wells as well to further exploit shale oil production. American Petro-Hunter has opted to focus on shale plays because these wells typically have long, stable reserve lives and predictable production.
American Petro-Hunter is a 50% partner in the NOJ26 well, a 4,000 foot vertical well in the process of being completed that cuts across multiple pay zones and through known producing Simpson and Wilcox formations. Wilcox wells often deliver initial production exceeding 100 barrels per day. The completion program focuses initially on the lower of two 40 foot pay zones. American Petro-Hunter expects the lower pay zone to produce at higher rates than its No. 1 well, which is already in production, and expects to commence production from NOJ26 later this month. The Company has high hopes for this project based in part on production from t wo analog wells located less than a mile away, which have cumulatively produced 46,000 barrels of oil and nearly one billion cubic feet of gas.
The Company has also secured government permits for a pipeline to be installed at the No. 1 well, which it expects to produce in a 75-80 barrel per day range. After NOJ26 is completed, American Petro-Hunter will have a total of four producing oil wells already on pump and generating cash flow.
Future plans for the North Oklahoma project include drilling a horizontal well down laterally and then along the Woodford Shale. The well will expose over 1,500 feet of oil-containing shale rock. Engineers estimate this well could be a 500 barrel per day producer. More horizontal wells are planned as well on the southern part of the Company's lease block, which has room to drill up to five horizontal wells in shale and up to 25 conventional vertical wells.
American Petro-Hunter also plans to leverage acquisitions to achieve its longer-term production goals. At present, the Company is evaluating two producing fields in California and one in Kansas for acquisition. Current production from these properties ranges from 50 to several hundred barrels per day. American Petro-Hunter thinks these assets may be undervalued based on estimated proved and probable reserves and has commissioned engineering studies. All three properties also meet management's purchase criteria by offering at least new 20 locations for development wells and opportunities to optimize production through offset drilling.
Lisa Springer, CFA -Bio and disclaimer: http://www.investorideas.com/About/Lisa-Springer-CFA/
The author, Lisa Springer is a freelance writer and was compensated for writing this article by Investorideas.com and doesn't own shares of any of the companies mentioned in this article.
More info: American Petro-Hunter, Inc. (OTCBB: AAPH)
The Company is a goal-oriented exploration and production (E&P) Company aiming to become an intermediate level oil and gas producer within 12 months. The Company is in production at the Poston Project in Trego County Kansas with new drilling activity and production underway at the North Oklahoma Oil Project. With the achievable target of becoming a 1000 BOE producer as our goal, American Petro-Hunter is actively on the hunt for domestic petroleum assets.
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