mississippi lime update

Most of the larger players in the Mississippi Lime (ML) have now released their quarterly results in the US with mixed results.

Starting with the less positive points:

- Sandridge Energy have revised their Estimated Ultimate Recovery (EUR) downwards as they have recorded faster decline rates for oil. Important to note however that Sandridges' landholdings in the ML span over a large area across Oklahoma and Kansas so these faster decline rates are most likely averages and may not apply to all Counties. Range Resources, who is our closest neighbour have not reported any problems with faster decline rates and appear to remain positive in relation to the ML. Will provide more details on this later.
- Apache Corp, who were supposed to provide production details from their first horizontal in NW Kansas near our landholdings, did not do so. The ML was hardly even touched on in their latest quarterly presentation which gave me the impression that initial results were not very exciting. This was further confirmed IMO by the fact that they stated that that they would be concentrating their efforts in 2013 in the United States on the Permian and the Anadarko Basin and not the ML. Other players drilling in Kansas have also reported problems of excessive water in their wells. I have decided to lower my expectations in relation to AOK's Kansas ML landholdings but I am hoping that they have better luck with some of the other formations there like the Lansing-Kansas City or Cherokee Sand.

Now on to the more positive points:
- Devon Energy, our neighbours to the North of AOK, have remained positive on the ML. The following is an extract from their latest quarterly conference call:
"Devon has established a very large position in the Mississippian oil play located in north central Oklahoma. We now have approximately 600,000 net acres in the play, with roughly one fourth of this acreage in our JV with Sinopec. This position holds a potential to be a very large oil play for us. We’ve been ramping up activity and are currently running 15 operated rigs drilling both the Mississippian and Woodford shale targets.

In the fourth quarter, we tied in seven wells within the JV area. These wells were brought in line with 30 day IP rates of 335 BOE per day including 210 barrels of oil, above the high end of our tight curve expectations. Since year end we’ve brought on an additional 16 wells and have another 57 wells in various stages of completion. Because of pad drilling and the necessary infrastructure build out, we’ve been running a large backlog of wells drilled but not yet producing.

Our testing of various frac sizes as well as different landing points within the Miss is ongoing. But we continue to believe the key to optimizing development of the Mississippian play will be the integration of 3D seismic data, production data, logs, core samples and work to develop a comprehensive reservoir model and improve overall well performance. To this end, we have already obtained some 3D seismic and expect to have 3D over essentially all of our acreage by the end of next year.

Our drilling results should begin to reflect the benefits of this approach as we progress through the year. Even without the benefit of the improvements that we anticipate, our results to date support our economic view for this emerging play.

In 2013, Devon and our partner will spend some $1.2 billion of capital in the Mississippian and participate in approximately 400 wells, including about 300 operated wells and about 100 OBO wells. Roughly two thirds of our drilling will focus on our acreage inside the JV with the balance focused on derisking our acreage to the north and northwest. We expect to add at least five additional operated rigs as we go through the year."

http://seekingalpha.com/article/1207591-devon-energy-s-ceo-discusses-q4-2012-results-earnings-call-transcript?part=single

- Now moving on to Range Resources, which IMO, is the most relevant comparison and benchmark to AOK, due to their proximity. Range in their latest quarterly conference call also continued to remain positive on the ML and believed that their location in the ML was one of the best in the play so this comment should also apply to AOK.

Relevant extracts from their conference call are as follows:
"In the Mississippian play, we have approximately 160,000 net acres located along the Nemaha Ridge. Like the Marcellus, we believe it's really important where your acreage is located, and we believe our position on the ridge is highly prospective. Please refer to the press release for the details of the wells brought online in the fourth quarter.

I'd like to point out that we're still seeing great results, and we recently brought online a well at over 810 Boe per day. Also, we're announcing the 30-day rates of the 2 fourth quarter wells, and those wells are averaging over 800 and 600 Boe per day for the 30 days. We have 5 rigs running, and the current plan is to bring online 51 wells and 17 salt water disposal wells this year."

In the Q&A session, the following was also very relevant and informative:
"Ronald E. Mills - Johnson Rice & Company, L.L.C., Research Division
Just on the Mississippian. You've talked about your portion of the play, and the results in your portion of the play along the Nemaha Ridge have been different and a little bit better than to the western part in terms of EURs and potential spacing. When you look at your Mississippian and the 80-acre spacing and the longer laterals, can you talk about some of the variability? And how much of that is driven by the chat and how the presence of that chat in -- if that creates variability, how you work through that?

Ray N. Walker - Chief Operating Officer and Senior Vice President
Yes. Sure, Ron. This is Ray. It's a good question. The Nemaha Ridge -- well, let me back up and kind of step out broader. The Mississippian, and Jeff said it before, and I think most of us agree, is a huge stratigraphic play and it's going to have structural enhancements. And we believe one of those structural enhancements is the Nemaha Uplift. And one of the enhancements on the Uplift is the fact that there is more chat present in general, and the chat has a lot higher porosity, better perms. So i.e., more storage capacity for hydrocarbons there. It is a very diverse and unconventional type structure, so we are still really, really early. When you look at the amount of acreage that we have in our 160,000-acre position there, just a few wells literally that we've drilled to date. So what we've done is very similar to what we did in the Marcellus, and we're going to show you what the wells are doing, good, bad and ugly as time goes on. So what you see in our presentation is what the wells look like that we did, the early vintage, 2009 to '11, which were primarily shorter laterals, and came in at around, I think, 485 Mboe-type wells. And then the 2012 wells, which look like they're on -- around a 600 Mboe-type curve, and all of that is in our presentation, so what we'll continue to do is set that out there. But literally, we don't have enough wells yet to understand or be able to predict what the whole thing will do. So we're going to take again an approach we did very much like the Marcellus and just tell you what the data looks like as time goes on. So quarter-by-quarter, we'll continue to update those curves, and we'll just put that data out there. And you'll know what we know going forward.

Jeffrey L. Ventura - Chief Executive Officer, President and Director
Yes. Let me tack onto that a little bit. I think -- if you look on Slide 48, it's on our website, and what it shows is the historical cumulative oil production per well from the Mississippian. This is looking at all the historical vertical wells, and there's a lot of them. And by far and away, the best vertical wells in the play are on the northern part of the Nemaha Uplift in Kay County, Cowley and Sumner up into Kansas, right through that little area. The vertical wells in Kay County are the highest. They're at 85,000 barrels per well. If you think about a horizontal well, really, it's a multiplier of a vertical. So a horizontal could be, in any play, really 3x a vertical, 4x, 5x, 6x or whatever. So one good indication of where the best horizontal wells are going to be is look where the best vertical wells are. So -- and to compare that, if you go way off to the western side of that map, or that stratigraphic trap shown in green, as Ray mentioned, the vertical wells, say, in Woods, Barber, Comanche counties are 13,000 barrels, 22,000 versus 85,000. So they're significantly different. And then there's a slide right next to it, on 49, that shows -- as you go far west, the other thing that happens is the play gets gassier. So we are, there's better vertical wells, higher oil cuts. Then the question is why, and it's back to those things that Ray said. We think when you're up on the Uplift, or the things you mentioned, Rod, early on, when you're on the Uplift, you're -- one, you're higher structurally, which we think is a positive; two, you have a chat component that when you're on the uplift that you have, but when you're off it, you tend to lose. In fact, it's not just being on the uplift, you've got to be on the northern part of the uplift to have that chat component, plus, you have a higher degree of fracturing up on the uplift which enhances permeability. So we think that's what supports better vertical wells, so far, or better horizontal wells. And then like Ray said, we'll just update you with time as they are just like we did in the Marcellus.

Ronald E. Mills - Johnson Rice & Company, L.L.C., Research Division
And is that also driving a little bit tighter spacing on your portion or what's driving the potential for tighter spacing versus...

Ray N. Walker - Chief Operating Officer and Senior Vice President
Yes. If you go to Slide 47, and what drives that, because you have that chat component, you have higher porosity, you have better storage and you have a higher oil cut, you have more hydrocarbon in place. On Slide 47, when you look at where we are, the EUR under those various types of completions, even if you use 600,000 boes per well, we're only recovering 6% to 11% of the oil in place, so a very reasonable recovery with that kind of well, so that's what drives the tighter spacing is really 2 things, it's higher hydrocarbon in place, and then just simplistically, we have a higher oil cut. Again, going back to where we are on Slide 49, in Kay County and Cowley County, Kansas, those 2 areas, 92%, 95% of the wells are oil wells. So if you go up to the west side of the map, somewhere between 38% and 47% of the wells are oil wells. So it's a lot gassier. And generally speaking, the gassier you are, the wider the spacing. The oilier you are, the tighter the spacing. The more hydrocarbon in place, the tighter the spacing, the less, the wider the spacing. So that's why we think what we think and it's supported by the wells we've drilled so far and we'll just keep updating you.

http://seekingalpha.com/article/1230491-range-resources-management-discusses-q4-2012-results-earnings-call-transcript?source=google_news

Important to also note the following comments from Range as well which highlights the fact that the ML is still a very new play and continued positive results is not guaranteed.
"In the Mississippian, we're just starting. We started there in 2004, but we started in the Tonkawa and then we started with our vertical program. We drilled a number of good vertical wells. Then we converted in 2009 to '11 and drilled a handful of good horizontal wells. And we reported those, over 485,000 boe. They're still hanging in there, they look good. Last year, we drilled a handful of wells, more horizontal, but it's still a handful of wells. And those wells were 600,000. And we'll update you with time. But when you look at -- so it's new drilling and it's really just across the southern part of our play, almost spans the width of the ridge, but it's not 7 years' worth of history and 7,000 wells, it's a couple years' worth of history and 20 or 30 wells. So as with time, if the Mississippi continues to drill out, and it may or may not as we go north. Hopefully, it's just like the Marcellus and it does, and if it does, then we'll continue to ramp up our drilling, 5 to 10 to 15 rigs, and we'll do that."

Overall, looking quite positive for AOK as they appear to be in the right location and their great vertical results to date could very well be a strong indication of how good our horizontals will be in the future when we start drilling them.