TMS related news.
In recent quarters, a handful of independent exploration and production (E&P) outfits have touted their acreage in the Tuscaloosa Marine Shale (TMS), a formation that stretches from Texas to Louisiana and Mississippi. The field is far from a new discovery; famed Mississippi wildcatter Alfred Moore spearheaded drilling in the TMS in the 1960s.
The play’s proximity to the Haynesville Shale should make it easier for producers to redirect drilling rigs from the out-of-favor dry-gas play and limits bottlenecks associated with a lack of midstream infrastructure. Despite boasting similar geologic characteristics to the Eagle Ford, the TMS is far from a slam dunk, which explains the low prices that early movers have paid to build an acreage position.
Goodrich Petroleum Corp (NYSE: GDP), for example, amassed about 74,000 acres, paying an average of $175 per acre. Meanwhile, Devon Energy Corp (NYSE: DVN) has accumulated 250,000 acres on the Louisiana-Mississippi border at an average cost of $180 per acre.
Thus far, early movers in the TSM have yet to report drilling results, though management teams have indicated that these tests have been encouraging. Devon Energy recently completed drilling, coring and logging its first vertical well in the play and plans to sink its first horizontal well later this year. Denbury Resources (NYSE: DNR) and its partner EnCana Corp (TSX: ECA, NYSE: ECA) are at a similar stage in their drilling program and plan to sink a horizontal well in September.
During EnCana’s conference call to discuss second-quarter results, Executive Vice-President Jeff Wojahn described its TMS assets as “a promising liquids-rich opportunity” based on “how the rock breaks, the hydrocarbon content and gas in place, and the like.” Management also pegged the drilling costs for its first horizontal well–a 12,000-feet deep vertical shaft with a 7,500-foot lateral segment–at about $8 million.
Meanwhile, Goodrich Petroleum’s CEO provided a bit more color on his outlook for the TSM during the Q-and-A portion of the firm’s Aug. 4 conference call:
We’re very comfortable today with what we see from a geologic standpoint of going ahead and drilling wells. In fact we don’t really even see much need, at least in most of our acreage, for pilot holes. There [are] sufficient amounts of historical vertical wells that have been drilled through the Tuscaloosa Marine Shale that we’re comfortable going out and drilling today. I would characterize at least in our view that the sole or the largest single risk to the play is just one of the economic performance versus well costs. We know the Tuscaloosa is present, sufficiently thick, thoroughly oil saturated. It’s just a little unproven in that no one has drilled yet a well that’s demonstrated in the EUR horizontally that would match up to costs. And that’s just [be]cause there haven’t been really many or any of them out there that have done that.
Drilling results in this frontier play could provide a meaningful upside catalyst for these E&P operators. At the same time, if the play proves uneconomic to produce or drilling results disappoint, the low cost of acreage provides a degree of downside protection.
Post any articles or information you believe to be relative to the TMS.
Lately I have been receiving an increasing number of contacts from members who are not currently leased and are concerned. The TMS Play is still in its infancy. There are a lot of unleased acres, and land owners, in prospective areas. The potential play boundary covers a large areal extent. Operating companies have to make decisions on where to lease and how much to lease based on their projection of what they can drill within the terms of the leases.
This situation appeals to companies that don't operate (drill wells), prefer not to operate but can do so on a limited scale and those companies and individuals who invest in leases with the sole intent to sell (assign) them to others.
IMO regarding these facts unleased members should know several things. An Oil, Gas & Mineral lease, properly executed and valid, must be honored by whatever company ultimately holds it regardless of the number of times it changes hands. If the best lease terms are from a flipper with an acceptable business history, I'd take it. However that is seldom the case since flippers need room to mark up a lease for a profit they seek to acquire leases at below market rates.
The operators who have a history of drilling and operating wells long term have learned some hard lessons over the last six years. Although they have generally offered 3 year primary term leases in the past that practice has caused problems in unconventional plays which may cover quite large areas. It's much easier to lease land then it is to get it drilled in a three year time frame. Some operators still offer a three year primary terms with an option (their option, not the lessor's) to extend the lease for two years. That can still get E&P companies in trouble with Southwestern Energy in the Brown Dense being the latest example of leases running out before the operator has fully tested or proven their leasehold. I am seeing more lease offers now with five year primary terms. Over the years I have decided that this is acceptable as long as the price is right.
I'd also like to offer a couple of warnings: the specifics of a mineral interest and the development activity in the surrounding area are very important to value, and the laws and regulations that should be taken into consideration are materially different between Louisiana and Mississippi. As we discuss the TMS Play every member should be aware that they need to understand the rules that exist where their mineral interest is located.
Do not fear being "left out". Do your homework and wait to be called on. Be patient. Don't let anyone rush you to make a decision. Do not fixate on getting the very best lease terms based on what others have. It's not a competition. Decide what is important to you, get as much of that as you can and if you are comfortable with what you can get, take it and have no regrets.
Great summary and advice Skip, well worded and explained. Thank you for all you contribute.
Yes, Skip. Well put. Thanks for all of your input and for sharing your expertise on this site.
Well said Skip, thanks for your incite.
Thanks, guys. Louisiana force pooling laws are covered quite well in KB's blog post: http://www.gohaynesvilleshale.com/UMI-Basics
It would be helpful if we could find some professional who could author a similar one for Mississippi.
Danny, attempting to predict the highest bonus offer is like trying to time the stock market. It rarely works and quite often just gets you in trouble. Basically the only thing that appreciably increases bonus offer amounts is competition. Where there is competition between one or more energy companies offers increase. That is especially so if those companies wish to operate. The best means to keep up is GHS and the monthly state mineral auction. Posts on GHS can give you an idea of what others may be receiving but are practically useless as a lever to get an improved offer in negotiations. The state mineral auction on the other hand is about the only public record where you can see competition and the actual bids as to royalty and bonus. It can not be refuted although landmen will often try to convince that it is not relevant. The state leases acquired in monthly tract auctions are not taken in the early stages of leasing. They are traditionally taken after most of the private leases have been assembled. This is because a state lease term is one year. If not drilled within a year the holder of the lease must make an additional payment to extend it for another year. As leasing progresses and units are formed/wells are permitted we will see more state leases announced.
Looks like the Great State Of Louisiana done sent the message to the Operators that "if ya gonna play, then your gonna pay."
State rejects Tuscaloosa Marine Shale oil and gas leases during May sale
~ ~ John
Good article John! Things are a changin
The state, or the public agency owning the minerals, may place a minimum bid on bonus and royalty. The state seldom comes off this minimum but occasionally other entities do.
NOTE: There will be a minimum bonus of $150 per acre and a minimum royalty of 25%.
The one tract that was successfully bid upon met the minimum:
Section 4 - State Agency - Tract 43920 - Comstock Oil & Gas Louisiana - St. Helena - 129 acres - $255 bonus - .25 royalty
Does anyone know if the state, schools & other public land owners be forced pool in LA or MS. In MS, if they can be forced pooled, I wonder if they have the 400% penalty.
I've never dug into the specifics of LA force pooling regarding public lands (its never come up) but from other instances of mineral law I suspect that the sovereign is not subject to compulsory integration. All municipalities, school systems, levee boards, etc. are divisions of the state.