The still blossoming Scoop/Stack plays of Oklahoma’s Anadarko Basin have attracted oil and gas players, lured by low acreage cost, proximity to Cushing and production potential.

But if market conditions worsen, aspirations for higher returns could steer producers to more developed plays such as the Permian Basin, according to a report released this week by Dallas-based market intelligence firm Alerian.

Plus, production is projected to fall, reversing a recent uptick, according to the U.S. Energy Information Administration. A drop in Stack rig counts vs. a rise in Scoop rig counts in recent months has infused angst among those down the pipeline.

The mixed signals could spark concern for some industry players. One midstream company has already lowered its 2019 guidance for natural gas gathering and processing volumes. Some E&Ps are redirecting capital to other basins; however, others are focusing on certain areas and getting favorable results as they gain knowledge about what works and what doesn’t.

Alerian says some headlines about the Scoop/Stack “likely read more negatively than the reality.”

“For example, increased drilling efficiencies and a shift to the Scoop from the Stack soften the implications of the notable decline in the rig count over the last year,” Alerian said in the report. E&Ps have also honed in on quality areas, bringing down well costs and cycle times and getting more from each rig.

Data from Baker Hughes Inc., a GE company, show rig counts for the Cana Woodford Basin—which includes the Scoop/Stack—dropped about 40% to 45 rigs at the end of May, compared to 76 about a year earlier. The overall U.S. land rig count declined by 10% during that time.

While oil price volatility, geopolitics and takeaway capacity in some regions may be behind the slowdown, Alerian pointed out rig efficiency and better techniques gained through the years have enabled companies to improve well performance with fewer rigs.

Continental Resources Inc. is among them.

The company reported in April that its production in the Scoop, where its Project SpringBoard is underway, rose 9% to average nearly 67,700 barrels of oil equivalent per day (boe/d). The company also said it is achieving its objectives with 25% fewer rigs.

Project SpringBoard production could hit 18,000 barrels per day (bbl/d) in the third quarter, up from the previously estimated 16,500 bbl/d, due to improved cycle times and well productivity. The project targets the Springer, Sycamore and Woodford reservoirs.

Continental’s Stack production for the first three months of the year averaged just more than 56,500 boe/d, down sequentially but up from a year earlier.

Alerian also mentioned Encana Corp.’s plans to drop to four rigs from 10 in the Stack during the second quarter but noted strong well performance was still driving production growth. Oil and condensation production are up 30% so far in second-quarter 2019 compared to first.

“We have pumped our high-intensity completion design on more than two dozen wells with development spacing of six to eight wells per section. Results from these wells have been very strong,” Encana CEO Doug Suttles said in a statement June 10. “When our industry-leading well costs are combined with our favorable royalty structure (<20%) and agreements to access preferred oil and gas markets, we can deliver strong and competitive returns in the Stack.”

Encana, which completed its acquisition of Newfield Exploration in February, said its Anadarko Basin production was averaging a record of more than 160,000 boe/d, a double-digit increase over first-quarter 2019.

But news from the Anadarko Basin has not been overly optimistic.

“[Devon Energy’s] management said on the 1Q 2019 call that they would drop a frac crew in the Stack in 2H 2019 and that reducing investment in the Stack would be the first lever to pull if needed to stay within their capital budget,” Alerian said in the report. “In other words, [Devon] would prioritize other plays over the Stack if necessary.”

The company cut capital spending allocated for the Stack to 20% this year from 31% last year, according to Reuters calculations based on company presentations. The reallocation aims to improve cash flow from the Stack while focusing investment where returns are better, spokesman Tim Hartley said.

Spending cuts were also made by Cimarex Energy Co., which slashed its planned spend to 15% from 30% last year.

“Because we were living within cash flow, we just had a higher degree of confidence and decided to swing more of our capital into the Delaware Basin this year,” Thomas Jorden, CEO of Cimarex, said in a first-quarter earnings call.

In addition, Alerian said recent struggles of Stack pure-play Alta Mesa Resources Inc. could also be concerning. Alta Mesa, formerly Silver Run Acquisition II, was formed in 2018 by the combination of Alta Mesa Holdings’ upstream assets and Kingfisher Midstream LLC’s gas processing assets.

“In recent quarters, [Alta Mesa] has reduced its estimates for average well production, daily production, and pipeline volumes. This year, the company has written down assets by $3.1 billion, laid off nearly a third of its employees, and is being investigated by the SEC for potential fraud due to reporting errors,” Alerian said.

But geology is not to blame, according to Alerian, which pointed to “numerous missteps by management and high spending” as reasons behind missed targets and lowered guidance.

However, the geology in the Scoop/Stack is complex.

“The Scoop/Stack is not a traditional shale play, so when you think about developing it, there are a number of different rock types,” Denise Yee, vice president at consultancy RS Energy Group, told Reuters. “As it’s so complex, the hydrocarbon mix changes across the play, and the oil window is limited.”

Like other basins, there have also been parent-child well challenges.

These problems are reflected in a higher median breakeven price needed to cover costs in the Scoop and Stack, according to data from consultancy Rystad Energy. Since the start of 2018, that price has been $54.53 and $53.15 per barrel of oil, respectively, higher than the Permian, Bakken, Denver-Julesburg and much of the Eagle Ford shale basins.

“The ‘Permian Jr.’ nickname set some lofty expectations,” said Shak Ahmed, research analyst at RS Energy. “The play is resetting expectations around what it is capable of, and while this won’t be painless, it will be better in the long term.”

The mixed news flow out of the Stack/Scoop is expected to continue, according to Alerian, considering the plays’ earlier stages of development and variability.

But the firm said: “For midstream investors, there is little cause for concern given diversified asset footprints, rising activity in the Scoop, and continued E&P optimization across both plays, allowing more to be done with fewer rigs.”

Velda Addison can be reached at vaddison@hartenergy.com. This article contains information from Reuters.

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