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Snow Globe or Crystal Ball: The Scoop on Oil & Gas Investments

There is no “crystal ball” when it comes to investments in oil & gas. The old adage is as true today as it was when we made our first investment: “If it is too good to be true then it probably is.” The reality is that investor discernment is more crucial now than ever with the entry of market dynamics and the fluctuation of commodity prices. In the trailing twelve months, some investors feel more like someone just “shook it up,” and we are all waiting for the proverbial snow to settle.

Infrastructure companies – such as midstream and pipeline companies – are beginning to show signs of resurgence. There is a wave of infrastructure expansion with strong growth in the production of oil and natural gas. Interestingly enough, these investment opportunities have a multi-year forward cycle when you consider the necessary reconfiguration of existing facilities that can produce significant return on investment and long-term shareholder value.

According to The Texas Alliance of Energy Producers, “Independents have drilled 96% of wells in Texas, and produced 88% of the oil and gas in Texas.” To raise the needed capital for oil field development projects and the production of oil and gas in commercial quantities, independents rely heavily on investment partnerships. Because the operators are not fully capitalized, this provides a great opportunity for a win-win in prospect development. By looking at the merits of each individual prospect, investors can quickly determine costs to drill and the rate of return on production. This allows for the partnership to expand the portfolio and project footprint at a much faster pace and provides some diversity of investment for the investors and the operators.

Innovation and improvements in drilling processes are leading to even greater accessibility to formerly off-limit reserves. Coupled with new techniques being used to drill more wells, expect even more opportunities to be presented to investors in the coming year. To protect your asset portfolio, there are some key questions you do not want to overlook when considering an opportunity:

  • What is the operator’s success rate? What is the track record of the operating team?
  • What technology is this operator using? Or better yet, what innovations have they implemented with success?
  • Can the operator produce projections of existing wells? Or demonstrate month-over-month sustainability within the project?
  • Is your investment directly in the working interest? More importantly, will you receive a deeded title to your interests in the well?

“Drill, baby drill.” Those famous words apply not only in the geological sense but should describe the investors’ mindset about due diligence regarding an oil and gas opportunity. Start the research and analysis process early so that when 2013 arrives you can hit the ground running.

Below the Surface: A Look at Trego County’s Oil History to Now

In more recent years, oil exploration continues to increase in areas of western Kansas. And located in the heart of current exploration lies a 30 square mile area predominantly known for its historic ghost town and lucrative production history: Trego County.  This county is rapidly growing as an area for oil production in the Mississippian Formation.

Since 1923 Trego County has been the site of several major oil discoveries, including its first oil pool discovery in May 1929. Production began in the basal conglomerate of Pennsylvanian Age rocks at a depth of 3,960 to 3,972 feet.  This area of Trego County became better known as the Rega pool. This first pool was soon abandoned but not before churning out 15,000 barrels of oil. The pool was later revived for another three years in 1947; however it was permanently abandoned in 1950.

A few years following the Rega pool discovery, Trego County was home to another productive oil pool. In 1934, the WaKeeny pool was found in the northern part of the county. Drilling from Pennsylvanian Age rocks began and oil production increased for several years following the WaKeeny pool discovery.

Just four miles northeast of Trego County’s first pool, the Gugler pool was discovered in 1936. Production of oil was from both Pennsylvanian Age and Arbuckle rocks of the Cambrian and Ordovician Age.

With steady oil production from these earlier discoveries, Trego County went through several years without any new discoveries. Then, in 1941, the Ogallah pool was found and opened, about four miles north of the Gugler pool. As the oil industry continued its dissent in western Kansas, production increased steadily into the 1960s.

Between the 1920s to the 1960s, the oil industry went through an array of evolution – both in exploration and drilling technologies. By 1963, production in Trego County had reached 1,582,000 barrels of oil, drawing from 331 wells in 29 different fields. Since Trego County’s first oil discovery to the end of 1963, almost 19 million cumulative barrels of oil had been produced.

Today, the oil industry continues to be at the heart of Trego County. After the oil boom of the 1920s, and due to insufficient technologies, many of the areas were neglected until recent years. Currently, oil exploration is on the rise and a “second boom” has prompted new interests and increased production.

Oil & Gas Activity Poised to Rise Sharply in Kansas Creating More Jobs and Opportunities

Companies, large and small, have been scouting the Mississippian Lime oil play and seeing plenty of activity. According to the Kansas Corporation Commission (KCC), oil and gas industry activity is on the rise. The filing and approved intents to drill has already drastically increased 44% from March 2012 to June 2012 (KCC). And with companies seeing consistent or increased production of wells (like Chesapeake Energy Corp. reporting average second quarter production at almost 200% more than a year ago), Kansas is an area that is poised for opportunity.

Wherever Oil is Being Tapped, Jobs Soon Follow

With the average oil worker salary nearly at $100,000 nationwide (Rigzone) this area could be a big opportunity for many in-state and out-of-state workers. In addition to oil rig workers, landowners are already seeing payoffs for mineral rights that allow companies to drill.

New Technology Improving Economics

Currently the majority of wells in the Kansas area are vertical, however with the introduction of more and more horizontal wells, drilling and production can be handled differently allowing for improvements in efficiency. A horizontal well costs about four times the amount as much as a vertical well, however one horizontal well can tap an area that would take four vertical wells to penetrate and get better drainage of oil. Although horizontal drilling on the Mississippian is currently concentrated around Coldwater and Medicine Lodge, companies seem to be working their way northwest.

With Kansas ranking 9th among the 50 states in crude oil production in 2011, the current activity is definitely something to keep your eyes and ears on the look out for.