Oklahoma’s shale play trajectories have changed course in recent months as rig counts dropped in the Sooner State. Despite operator enthusiasm for strong basin potential, high breakeven hurdles and unsupportive commodity pricing continue to threaten the viability of Oklahoma’s SCOOP and STACK. To make matters worse, a prominent STACK driller, Alta Mesa Resources (NASDAQ: AMR), paused their drilling program in January 2019, dropping six rigs before resuming drilling at a slower pace in March. With a major infrastructure project on the way later this year, are the cards still STACKed against Oklahoma in 2019?
BTU Analytics defines the SCOOP and STACK as unique sub-locations, which are aggregations of counties on the basis of similar geologic, production, and midstream characteristics. A map of how we delineate the SCOOP and STACK can be found in this previous Energy Market Commentary.
The SCOOP has employed fewer rigs than its STACK counterpart since July of 2015, but rig counts in the two regions have moved in tandem for the majority of the last four years. However, the trend decoupled in 2019 after crude prices plummeted in late December. Rig counts in the SCOOP have stayed relatively flat over the last six months. Simultaneously, STACK rig counts plummeted approximately 42% in 2019 after 18 months of sustained activity near 60 rigs to the mid-30’s today. One of the contributors to this rapid decline in STACK rigs was Alta Mesa Resources’ decision to drop all six of its active rigs in January 2019.
Alta Mesa Resources (NYSE: AMR) was the most active STACK horizontal driller in 2018. However, in the first half of 2019, drilling has slowed substantially. After instigating a drilling hiatus in January, a drilling program reemerged in March with only two rigs. According to Alta Mesa’s May press release, drilling costs for the new program are substantially down compared to the prior program. In total, the number of wells drilled during the first half of 2019 were only 37% of the previous full year total. And with rig counts at new lows, catching up to 2018 levels likely remains out of the question.
BTU Analytics’ estimated breakevens from our E&P Positioning Report for the SCOOP and STACK remain among the highest in major US shale plays, but economic viability varies significantly based on operators’ acreage positions and natural gas price assumptions. NGPL-Midcon and Panhandle (PEPL) pricing have both fallen below $2/MMbtu in 2019, and only in the last week or so have declines relented. The chart above highlights the relationship of STACK activity to regional natural gas prices.
Luckily for STACK producers, gas market dynamics may be improving later in the year with Cheniere’s Midship project entering service. Midship will connect 1.1 Bcf/d of SCOOP and STACK production to existing pipelines that reach the Carthage and Perryville market. Midship originates in Kingfisher County in the heart of the STACK, providing some relief to STACK operators that can deliver their molecules to Midship.
Economics for Oklahoma wells in aggregate ride the fringes of profitability given today’s commodity pricing. Consequently, market volatility will have significant impacts on the SCOOP and STACK activity levels. Will Midship’s completion reverse sinking rig counts due to gas pricing relief in the STACK? How will changes in SCOOP and STACK production impact the outlook for competing natural gas plays? To find out more about the impacts of current market dynamics on Oklahoma production, request additional information about our Upstream Outlook service.