What's the Deal With Devon Energy?

Recently, I wrote an article for ClineShaleSite.com titled Devon Bails but the Cline Shale Heat Up (APA, DVN, LPI, PXD).  The article was meant to be a summary of the last four months of news from the area, and I thought the title aptly summarize it, but I got a question from a reader asking whether or not I thought Devon had "truly bailed" or if they were merely scaling down to study completion techniques before ramping up again.  So with this post I want to clarify what I meant by "bailed", and  point out the evidence and economics I base my opinion on.  In short, I'd say Devon looks ambivalent on the Cline Shale, more interested in waiting for other operators to explore and delineate that investing the capital it takes to do that for itself.  Here is some discussion of the things I consider in making my assessment of Devon's presence in the Cline.

Highlights From The Last 4 Months

If you are looking for news on the Cline shale, there is a lot more available on the internet now than there was at the beginning of the year.  Things are obviously heating up.  I thought I'd put together a chronological list of the news, press releases, and company investor presentations that caught my eye over the last 4 months.  I included links to all of my sources.  If you see anything wrong, let me know.

A question from twitter

I was asked a question on twitter today, and as my answer did not lend itself to 140 characters, I thought I'd use a blog post to answer it.  By the way, if you ever have a question about anything remotely related to the exploration of the Cline formation, I'll always oblige you with my best answer.  You can use whatever medium you like to reach me.  Here's three easy ones: 1) twitter (@MeMattZ), 2) the comments section below any blog post, or my email address is Matt@ClineShaleSite.com

Anyway, here's the question:

Lubbock Committee Sees Value In Drilling

This is just a re-post of an article I wrote for ClineShaleSite.com last week.  If you haven't, check that site out.

Have a Great Day,

-Matt Z.

Individual states hold the lion’s share of regulatory power over oil and gas drilling activities, but an often overlooked source of regulation comes from municipalities within those states. In Texas, “home rule” municipalities (i.e. towns with more than 5000 residents) are given broad powers to propose and enact ordinances to regulate anything within their area of incorporation that has not expressly been prohibited by the legislature. With the recent surge in drilling activity, many of these municipalities are making it a priority to update their drilling ordinances to address changes in practices due to the shale revolution, as well as changes in attitudes of their constituents. While these ordinances only affect drilling within city limits, a narrow area when compared to the overall size of Texas, they are important because they reflect the attitudes of civic leaders and residents towards the oil and gas industry.

Earlier this year, Lubbock’s City Council decided to revisit its drilling ordinances, and this potentially has implications for the Cline Shale due to Lubbock’s influence on other West Texas cities.  Although Lubbock sits about 80 miles north of the Cline’s perimeter, it is the largest city in West Texas and the largest within 250 miles of the formation.  Additionally, the dozens of active wells within the city limits are relevant on a daily basis to its residents. Other communities in West Texas are likely watching Lubbock closely for guidance with respect to their own drilling ordinances.

I recently attended a public meeting of the committee tasked with advising Lubbock’s City Council. You can learn more about the committee’s members and their qualifications here. As expected, tensions between industry supporters and those concerned with purported health risks associated with drilling were apparent during the meeting. On the one hand, drilling contractors spoke of the positive impact their business have had on the community, and, on the other hand, concerned citizens voiced reservations about the expansion of drilling activity. Anne Epstein, a doctor, the chairperson of the Lubbock Board of Health, and a member of the committee, also made a presentation outlining the public risks identified by the Board and presented recommendations to mitigate the same. Initially, Epstein took heat from the other committee members who demonstrated skepticism about the data Epstein and the Board of Health had relied upon. The issues that drew the most discussion were well bore integrity, fresh water use, water contamination, mandatory closed loop drilling, and well set-back distances.

However, in sum, what I observed during the meeting leads me to believe that the committee members will likely make modest proposals to the City Council. In other words, I do not think it likely that Lubbock will make drastic changes to expand the scope of its drilling ordinances. Even Epstein, the committee member most opposed to drilling, acknowledged that the opportunity sitting under our feet is too immense to impose a blanket ban on drilling and fracking.  I think this bodes well for Cline development. If Lubbock plays out as I predict, it indicates to the leadership of other area cities, that when they stand up to the draconian rules often proposed by energy industry skeptics, they will not be alone.

Marfa Wildcat Story

This morning I came across a good, fun read.  Jennifer Hiller (@Jennifer_Hiller), a reporter covering the Eagle Ford for the San Antonio Express-News spent a few days hanging with wildcatters way out in the sticks of far west Texas and writes about her experience here.  Woven into her story are tidbits of oil and gas law, oil and gas finance, logistics, and other nifty factoids.  It's a long article, but if you give it a chance you'll probably do like I did and get a quarter of the way through it and commit to reading to the end to see if they hit pay-dirt.  I wouldn't dare spoil it for you.

Happy Monday :)

New Friends: ClineShaleSite.com

Ok, big news: I've decided to share some of my writing with friends at ClineShaleSite.com

After talking with them and learning that we share a common excitement and long-term bullishness for the Cline, the decision to contribute to their site was an easy one.  You can click over and see my first post for them here; or, since it is slightly abbreviated there, I'll post the unabbreviated version below.

Barnhart is a small unincorporated town with a population less than 200 that sits about an hour’s drive south-west of San Angelo.  However, this is not your typical, sleepy, rural Texas town.  Every day the town’s streets swell with traffic as workers from other communities converge on Barnhart to make use of the South Orient Railroad, which connects the Permian Basin to Houston.  Sand and other oilfield materials go in to Barnhart; oil goes out to Houston.  With the development of the nearby Cline and Wolfcamp formations, this tiny town has become a very valuable outpost.

However, Barnhart has also become the source of much controversy since it was reported back in June that the town’s lone water well had run dry.  Since then, several publications (The Guardian, The Houston Chronicle, and The Daily Kos) have opined that fracking has consumed all of the town’s water leaving the residents and livestock there thirsty.

Currently, Texas is in its 3^rd year of a drought that began in 2011, a year which has been labeled one of (if not) the worst year(s) for rainfall in recorded history for the state.  The last two years have been a poor reprieve from that time.  Today, Texas lake water levels average 66% of capacity, and groundwater depletion is a growing concern.

Is fracking to blame for the Barnhart well running dry?  To answer this in the affirmative, like the above mentioned publications, is to give in to pure speculation and ignore the myriad of factors that weigh on this issue.  It’s easy to blame and demagogue the highly visible semi-trucks hauling tank-full after tank-full of water.  It’s more difficult to point the finger at the ranchers and farmers who often account for 3 to 20 times the water used for fracking in the communities around oil rich formations.  The author of the Guardian article points out that in nearby Crocket County fracking consumes 25% of all water used, but she fails to note that there are less than 3700 people living in that mostly infertile area.  All of the authors seem intent on fear mongering by pointing to Barnhart as evidence that the oil industry is going to run our entire country out of water, but in Texas - the number one state for oil and gas production by far – fracking has never accounted for more than 1% of annual statewide water use.

The real issue to be highlighted in Barnhart is the necessity for smart leadership and coordinated efforts among parties with an interest in maintaining the value of a common resource – that resource being the town, its people, infrastructure, and also its groundwater.  It would behoove the people of Barnhart to incorporate their town, elect leaders, extract tax revenue, and begin the coordinated dance with the oil companies that other Texas municipalities have learned to embrace.    

Today Barnhart is not without water.  Five days after the well went dry local crews were able to bring an old railway water well back into production to meet the community’s needs, but it’s just a temporary fix to their water issue.  In the long-term nothing short of breaking out of this awful Texas drought will sustain the efforts in the Permian.  My suggestion to those concerned is to do as the salty old Texans who have survived through thick and thin do – pray for rain.

Cline Shale Area Tax Revenues for June

Over the last few months I've noticed that Abilene Reporter-News (ARN) has done a good job of reporting on the sales tax revenues from some of the municipalities in the area of the Cline Shale.  But those familiar with the area should notice they don't report on ALL of the cities in and around the Cline.  Most notably they leave out Midland, San Angelo, and Roscoe (and maybe Lubbock is worth mentioning too).  With a population of about 1300, it's no major offense that Roscoe wasn't included in their report, but it does seem odd that ARN decides to include much smaller towns like Robert Lee, Roby, and Mertzon.  The latter two towns are smaller than Roscoe by half.  Curious.

Anyway, I'm going to take what ARN reports and include the approximate populations of the towns to give a better frame of reference.  My conclusion about this data is below - but I'll save you the time - this data shows nothing really significant.

Increase/Decrease in Year-Over-Year Sales Tax Revenue

Abilene (pop. 118,100) - up 0.78%

Big Lake (pop. 3,000) - down 4.13%

Big Spring (pop. 27,400) - up 3.70%

Colorado City (pop. 4,200) - up 18.78%

Mertzon (pop. 800) - up 84.27%

Robert Lee (pop. 1,100) - up 11.73%

Roby (pop. 700) - down 6.5%

Snyder (pop. 11,200) - down 1.01%

Sterling City (pop. 900) - up 9.73%

Sweetwater (pop. 11,000) - up 8.55%

My conclusion about these numbers is similar to that of the previous month's report, which I blogged about two posts ago.  This is a mixed bag of data, and it is obviously too soon in the development of this formation to see major effects of drilling operations.  Sure, Mertzon's 84% increase is likely due to drilling activity, but how much activity do you think it takes to move its' needle?  Less than a thousand people live there.  If by chance a tour bus stops in Mertzon for lunch one month, that could result in an 84% increase in sales tax.  I kid.  But seriously, one thing to keep in mind when reading these numbers is that Texas in general has a strong economy and there are many factors at play on the economics of these municipalities, not just the oil industry.

Here is the original ARN article this data was taken from.

And if your interested, here is ARN's article on May's sales tax receipt data, and here is the one for April.

I see a spreadsheet and some data-tinkering in my future.