I'll admit it -- I'm biased toward shale. When a friend approached me at a dinner party last week to discuss the ins and outs of hydraulic fracturing, I waxed poetic on the Marcellus and the Utica, discussing the pros and cons of fracking with an effusiveness I typically reserve for conversations about James Baldwin or the Brill Building or macaroni and cheese. Not once did I mention the magic that's going on in the Mississippi Lime. I'm as guilty as anyone for neglecting limestone -- until today.
Where is it, what is it?
Back before you were born, shallow seas covered most of Oklahoma. Over time, the seas dried up and left behind plenty of fossils and other decaying organic matter. Now, stretching beneath the earth's surface in southern Kansas and northern Oklahoma are thick layers of limestone packed with natural gas, natural gas liquids, and oil.
One hundred years ago, the Mississippi Lime boomed with oil production from vertical wells. Eventually, these wells tapped out, and the industry packed up and left. But now, the boys are back in town, utilizing horizontal drilling and hydraulic fracturing to take advantage of the surprisingly vast untapped oil and NGL reserves.
What's the big deal?
Oil and gas producers are clamoring to find plays rich in oil and NGLs right now because they are far more lucrative than methane, also known as dry gas. NGLs track the West Texas Intermediate and generally sell for about 50% of the price of a barrel of oil. The price of methane is incredibly low in the U.S. right now, selling for less than $4.00 per MmBtu.
Let's use an actual example to demonstrate the significance of the price disparity. SandRidge Energy (NYSE: SD) is one of the biggest players in the Mississippi Lime. Take a look at this chart from its most recent quarterly report.
Source: Company press release.
Though the company produces significantly more natural gas, the price of oil does all the work on the bottom line. This is the appeal of drilling in the Mississippi Lime: The formation's ratio is estimated to be 52% to 55% oil.
The other upside of this region is that the porosity and natural fractures in the limestone mean lower costs associated with hydraulic fracturing. Drilling expenses are often half of what they would be in a shale play.
SandRidge isn't the only producer looking to cash in on the Mississippi Lime. The chart below shows the net acreage for some of the other big players in the region.
Chesapeake Energy (NYSE: CHK)
Devon Energy (NYSE: DVN)
Range Resources (NYSE: RRC)
PetroQuest Energy (NYSE: PQ)
Source: Company presentations.
These companies should be familiar to natural gas investors. Range Resources is frequently a first-mover in unconventional plays, and Chesapeake seems to own millions of acres in every natural gas play in the country, though it typically aims to sell large swaths of its holdings to other companies.
Mississippi Lime pure play
SandRidge is really the dominant player in the Lime right now though. The company is developing two different regions there and uses a specific investment vehicle for investors interested in the play.
SandRidge Mississippian Trust (NYSE: SDT) is one of two trusts operated by SandRidge that is focused on a specific geologic region (SandRidge Permian Trust is the other). Because the resources in any given region aren't infinite, the trust won't exist forever. The trust gives the company additional financing to explore and produce in the region and allows unit holders to profit accordingly. And profit they shall!
Production in the Lime for the third quarter of 2011 jumped 50% over the second quarter of this year and a whopping 653% increase over the same time last year. The company drilled 47 wells in the Lime in the third quarter and has drilled 108 there so far this year. It has drilled 147 horizontal wells total in the play, almost half of all the horizontal wells drilled in the Lime so far. The company has also identified 4,000 more drilling locations over its acreage.
The development of the Mississippi Lime is indicative of a trend at large in the oil and gas industry right now. Companies are pulling out of mostly methane plays like the Barnett Shale and moving to oil-and-NGL-rich plays like the Permian Basin and Eagle Ford field instead. If your investments aren't trying to take advantage of these plays, make sure management provides an acceptable reason why. When the price of natural gas begins to rise again, plays like the Barnett will become popular once again, but the immediate future belongs to oil and NGLs.
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