What’s Behind the Recovery in the Midcontinent Rig Count?

By Published On: October 21, 2016

The April 25, 2015, issue of Energy & Income Advisor explored a critical question for investors at a time when the market had fixated on near-term movements in oil prices: “What would the North American energy landscape look like in coming years?”

Our outlook for The Next Phase of the Shale Revolution asserted that US onshore oil output would decline in response to lower oil prices, though basins with the lowest production costs ultimately would take market share.

This scenario has played out thus far, with much of the attention focusing on the Permian Basin in West Texas, a mature play with multiple productive horizons that’s been revivified by horizontal drilling and hydraulic fracturing.

Independent oil and gas companies that focus on this region command premium valuations in the stock market and encountered no problems issuing equity when crude-oil prices plummeted in late 2015 and early 2016.

The main operators in the best parts of the Permian Basin enjoy lower break-even costs than their peers in other shale plays and have no problems accessing capital to accelerate their development plans.

That’s why the number of active drilling units in the Permian Basin bottomed about one month before the US oil-directed rig count and has made the largest contribution to the recent recovery in drilling activity.

(Click graph to enlarge.)
Oil Directed Rig Count by Basin

The bullish outlook for the Permian Basin also explains why about 65 percent of the $22.621 billion worth of asset acquisitions announced by US-based exploration and production companies so far this year involved acreage in the region.

Subscribers should consult the most recent issue of Energy & Income Advisor for our analysis of recent trends in energy mergers and acquisitions as well as our top takeover picks.

But drilling activity has also picked up steam in an emerging play in Midcontinent Oklahoma, an unforgiving region that’s also home to the Mississippi Lime and the Granite Wash—plays once hyped as the next big thing that ultimately failed to live up to the hype.

(Click graph to enlarge.)
SCOOP - STACK Rig Count vs Mississippian

Much of this rebound has occurred in the Anadarko Basin, specifically the so-called SCOOP and STACK plays—emerging prospects that we discussed at length in our E&P Playbook. Over the past 18 months, Devon Energy Corp (NYSE: DVN) and Marathon Oil Corp (NYSE: MRO) have closed sizable acquisitions to add a growth platform in this area.

As part of our ongoing effort to bring our subscribers the best analysis and intelligence, the Energy & Income Advisor team will attend the DUG Midcontinent conference to meet with key players in the region and learn about the risks and potential opportunities.

We’ll share our key takeaways from the event and our best ideas in an exclusive report for Energy & Income Advisor subscribers. If you haven’t joined our service yet, now is the perfect time to become a member.

On the fence about subscribing? Click here to download a free sample issue of Energy & Income Advisor to find out what we’re all about.


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