Felix selling STACK assets to Devon

OGFJ: As a Rockies-based company, why did you choose the Mid-Continent for your operations, and particularly, why the STACK crude oil play?

CALLANTINE: My partners and I started Felix in early 2013. We evaluated and pursued opportunities in numerous basins looking for projects that fit our core competencies and had the potential to make a return for our investors. We found that the Anadarko Basin in the Mid-Continent had more quality opportunities and a lower cost of entry than most other basins. Staying true to our strategy to develop projects of scale, we assembled positions in two different areas of the Mid-Continent - a large position focused on Pennsylvanian sandstones in Custer and Dewey Counties (in Oklahoma) and the STACK play (also in Oklahoma). Early in 2015, we sold our assets in Custer and Dewey Counties to focus our efforts and capital on the STACK.

OGFJ: Not all our readers are familiar with the STACK, Skye. Can you tell our audience a little about it? Also, your assets are surrounded by companies like Devon, Newfield Exploration, Cimarex Energy, and Continental Resources that seem to use different words like STACK, SCOOP, and CANA Woodford. What zones were you pursuing and how do the zones differ from what other companies in the area are pursuing?

CALLANTINE: Oklahoma operators that make a new discovery have traditionally used acronyms to describe the particular geographic area of interest. Newfield discovered and named the STACK play in 2013 which is located in the three-county area of Blaine, Canadian, and Kingfisher Counties, west-northwest of Oklahoma City. "CANA" in CANA-Woodford is shorthand for Canadian County, where the liquids-rich Woodford Shale was originally discovered in Oklahoma. The acronym "STACK" stands for Sooner Trend (oil field) Anadarko (basin), Canadian, and Kingfisher (counties).

We believe the core positions of STACK and CANA can be used interchangeably as the plays overlap and both have tremendous potential in the Meramec, Osage, and Woodford formations. The stratigraphic column in this area consists of thousands of feet of potential pay and more than 10 horizontal targets. Felix primarily focused on the 400- to 500-foot thick Meramec formation, drilling more than 30 horizontal wells in multiple benches, with additional tests in the Woodford and Osage zones. Within the core area of STACK, the industry has drilled approximately 1,000 horizontal Woodford wells and 150 horizontal Meramec wells.

"With the addition of our assets, Devon now owns 430,000 net surface acres in the STACK, which I believe represents the largest and best position in the most economic play in country. This is a cash and equity deal so we will soon be, and plan to remain, large Devon shareholders. We strongly believe in the quality of Devon's asset base, their ability to execute on those assets, their leadership and financial security, and the long-term value of our equity position in Devon." - Skye Callantine

OGFJ: You aggregated 80,000 net acres in the core of the STACK located in Canadian, Blaine, and Kingfisher Counties, Oklahoma. And, you're producing more than 10,000 barrels of oil equivalent per day. How was Felix Energy able to grow to a large scale in a competitive play to assemble its current position? How expandable is it?

MICHAEL HORTON: When we started, I wasn't sure that we'd even be able to put 10,000 acres together. Newfield had done a great job assembling its position, and the rest of the available leasehold in the area was so fractionated that it almost discouraged us, or anyone else for that matter, from entering the STACK play. However, the broken-up acreage and ownership ended up creating opportunity since no one had significant scale outside of Newfield and the traditional CANA players. Once we got started, we built momentum quickly as our message and commitment to honest dealing really resonated with the local community and industry. The volume of deals was incredible. It took us over 200 transactions and thousands of leases to put together our position. I'm very proud of our small team of five and what they've accomplished in partnership with our excellent service providers, notably Penterra Land Services, the PrayWalker Law Firm, and Associated Resources, Inc.

Through a lot of hard work, our team built scale effectively and efficiently and converted acreage into drillable locations in a remarkably short time. Going forward, nearly all of the acreage is accounted for in the core of the STACK. To this end, we believe acquisitions, similar to the Felix acquisition by Devon will be the only opportunity for growth in the STACK.

OGFJ: There appears to be some confusion about the STACK. Most of the oil and gas industry believes operators are still early in the exploration phase. You believe it's in development mode. Why?

CALLANTINE: Although the play has been around a relatively short time, the spectacular results have attracted discretionary capital from all the large independents you named earlier. This capital, along with the high-level technical abilities of these independents, has rapidly de-risked the play and advanced the industry's collective knowledge. Over the past six months, nearly all of the companies operating in the basin have been testing spacing and stacked laterals along with continued optimization of lateral length and stimulation design. The result is the STACK play has become very predictable and repeatable with excellent economic returns in multiple pay zones.

OGFJ: The STACK play has a large product mix range of oil, gas, and NGL, including oil from 25% to as much as 90% on a BOE/D basis. What decision processes - product mix, well location, drilling costs, etc. - did you use to meet or exceed your well economic targets?

CALLANTINE: First and foremost, the play is underpinned by high reservoir quality, which allows for large quantities of all hydrocarbons to be produced by each well. Our focus in the Meramec has been around the volatile oil window where the reservoir is over-pressured, has a high percentage of oil, and excellent reservoir quality. This area is characterized by high initial production (IP) rates and moderate well costs, a fortuitous combination yielding the best returns. The black oil window has slightly lower productivity but the well costs are also lower - yielding solid returns. Unlike other plays in Oklahoma, we avoid the costly requirements associated with handling large water volumes because no formation water is produced from the Meramec or Woodford within the Felix footprint.

OGFJ: How do stimulation design and lateral length impact overall well performance and economics?

CALLANTINE: As you point out, two important variables in the productivity and economics of all resource plays are completion design and lateral length. Specifically in the Meramec, we have seen a 50% increase in the initial well performance in 2015 from enhancement to the completion design. We focus on generating more complexity near our wellbores by utilizing slickwater, more proppant, more clusters and Halliburton's diversion technology.

With respect to lateral length, both 5,000- and 10,000-foot laterals have generated very strong returns even in the current commodity price environment. We believe in many areas of the play, 5,000- or 7,500-foot laterals will ultimately generate the best returns in the context of full development. Of note, our recent 5,000-foot laterals have initial rates ranging from 2,500 to 3,000 BOE/D with greater than 80% liquids at an average cost of $5.5 million generating incredible rates of return. As the play evolves, understanding of post stimulation cleanup, testing of intermediate lateral lengths, and development layout will determine the optimal lateral length.

A drilling rig working for Felix Energy.
Photo by Nicholas DeSciose

OGFJ: In light of today's low oil prices, Felix undoubtedly has made some operational changes or implemented new ideas over the past year in an effort to improve your well economics. Can you describe what you've done?

BILL ARNOLD: Our primary approach to improve well economics has been to pursue better well productivity by aggressively pushing the envelope on our stimulation strategy. We are utilizing a high-intensity style completion technique using diversion material to achieve more near wellbore complexity. Other companies are using a different diversion approach to reduce well cost. They are using diversion to increase frac-stage length, therefore reducing the total number of frac stages and the total cost of completion. We have yet to apply diversion in this manner but do believe this technique is an effective cost reduction tool.

We have also observed that flowback methodology can have a significant impact on well productivity. We believe there are several variables at play here - for example, lateral length, pressure-volume-temperature (PVT) properties, and initial pore pressure. Since making this observation, we very carefully watch flowback parameters and adjust accordingly. While our primary focus has been making a better well, we have also been able to achieve significant cost savings due to increased efficiency in our drilling and completion operations. Our drilling times are top tier, and completion cycle times continue to improve despite the continuous increase in completion intensity.

The core of the STACK play is located in Canadian, Blaine and Kingfisher Counties, Oklahoma.
Photo by Jamin Yeager

OGFJ: You formed a JV and entered into long-term gathering and processing agreements with Tall Oak Midstream LLC. In a related transaction, EnLink Midstream Partners, Devon's joint midstream partner, announced on the same day as the Felix acquisition that the company would acquire Tall Oak Midstream. How valuable was the Tall Oak Midstream partnership for Felix, and what does it mean for Devon and EnLink going forward?

CALLANTINE: Our midstream joint venture with Tall Oak created a synergistic relationship with our upstream business similar to the Devon and EnLink relationship. Tall Oak has done an excellent job of staying ahead of the rapid growth in the play and has exceeded our expectations in every way. In the STACK, Tall Oak laid approximately 200 miles of gathering pipelines in-service, installed multiple compression stations, and brought on a 100 million cubic feet per day (MMcf/d) cryogenic plant in October 2015. To support the growth of the Felix asset along with the expected third-party growth, Tall Oak has an additional 200 MMcf/d of capacity planned for the third quarter of 2016. Devon and EnLink are simultaneously acquiring world-class assets that are even more valuable with their unique structure.

OGFJ: In terms of rigs running, permitting, and other industry activity, how has the STACK held up during the commodity downturn compared to other liquids plays in the US?

CALLANTINE: The STACK is one of the few plays that experienced an increase in the rig count over the past 12 months. As of December 2015, there were approximately 25 rigs running in the play. The significant improvement in well performance coupled with the large reduction in well costs has made for compelling returns on drilling, even at current commodity prices. Every acreage holder in the STACK has reported that the economics are among the best in their portfolios, attracting discretionary capital spending to be reallocated from other basins and plays into the STACK. As we've said publicly, Felix is generating greater than 40% rates of return at strip prices below $40 per barrel.

OGFJ: What was Felix's overall response to the downturn in commodity prices?

CALLANTINE: As with the entire industry, we are not immune to the drop in commodity prices. First, we focused our effort and energy on making our project economic at current service costs and commodity prices. The downturn allowed us to get the best people and services to reduce the marginal cost of supply through efficiencies and improvements. Second, we were opportunistic by aggressively growing our asset through leasing and acquisitions. As others have been internally focused on preserving cash, we were able to significantly increase our leasehold in the core of the STACK play. Our hard work paid off.

"Our primary approach to improve well economics has been to pursue better well productivity by aggressively pushing the envelope on our stimulation strategy…While our focus has been making a better well, we have also been able to achieve significant cost savings due to increased efficiency in our drilling and completion operations. Our drilling times are top tier, and completion cycle times continue to improve despite the continuous increase in completion intensity." - Bill Arnold

OGFJ: Assuming a successful closing with Devon and EnLink, what's next for Felix?

CALLANTINE: We have closed on new equity funding and are currently looking for our next opportunity. Our team has demonstrated a number of core competencies, including subsurface technical rigor, excellent drilling and completion capability, and sound commercial fundamentals. We believe our reputation in these areas, along with our financial resources, will attract companies looking for partners. We'd like to hear from any of your readers looking to bring value forward on underappreciated assets in their portfolios.

OGFJ: Anything else you'd like to add?

CALLANTINE: I just want to say thank you again to my partners, all of the additional people who have supported our growth, and our investors for their dedication over the last few years.

OGFJ: Thank you for your time and best of luck on your future endeavors.