Shale Plays Gone Wild - The Fayetteville

Considering the development of the Fayetteville shale, it can't really be called an emerging shale play. However, given the amount of potential resources that are left in this region, it's also inaccurate to call it mature. With exploration and production companies still targeting this area with thousands of wells and billions of dollars in 2009, it's time to further investigate the Fayetteville shale.

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Shale Potential
The Fayetteville shale is located in Arkansas in the Arkoma Basin, and occurs at depths of 1500 to 6500 feet. The thickness of the shale can vary from 50 to 550 feet, which is an important factor in drilling as more natural gas can be recovered from a thicker vein. Geologically, the shale is from the Mississippian age, which is approximately 325 million years old. (Learn how energy companies operate, check out our Oil And Gas Industry Primer.)

Promising Development
The pioneering company in the Fayetteville shale was Southwestern Energy (NYSE:SWN). Southwestern started to develop the shale at the beginning of the decade, and after several test wells it began building its acreage. At the end of 2008, the company had 875,000 acres under lease. The company has made a large bet on this area, and has 1.545 Bcfe (billion cubic feet of oil equivalent) of proved reserves, or 71% of the company's total from the shale. Southwestern is by no means finished with this area and plans to spend $1.6 billion to participate in 650 horizontal wells, 500 of which will be company-operated. (Learn more in A Guide To Investing In Oil Markets.)

Participants
Southwestern and other companies in the shale employ horizontal drilling, where a well is drilled to a specified vertical depth and then extended laterally by several thousand feet. Also, hydraulic fracturing is used, where large amounts of water are injected into the well to fracture the rocks, which are then held open using a proppant.

Proppants can be made of sand or ceramic. CARBO Ceramics (NYSE:CRR) is one of the largest manufacturers of ceramic proppants. Some operators prefer proppants because proppants have the ability to withstand heat and pressure. Carbo shipped 1.162 billion pounds of proppant in 2008. It currently trades very close to its 52 week low of $30.38, which was set on October 28, 2008.

Chesapeake Energy (NYSE:CHK) is also a large acreage holder in the Fayetteville shale. However, in 2008, when Chesapeake was experiencing financial distress due to its high leverage, the company sold part of its acreage and net production to BP plc (NYSE:BP) for $1.9 billion in cash. BP has made moves into different shale plays in North America, including the Woodford and Haynesville shales.

The Fayetteville also attracts smaller exploration and production companies. PetroQuest Energy (NYSE:PQ) participated in 33 successful wells in this area in the fourth quarter of 2008, and is currently producing nine mmcf/day.

The Bottom Line
The Fayetteville shale is probably the most successful shale play in North America after the Barnett shale in Texas. Although the Fayetteville has been under development for almost a decade, the play is still far from finished and is attracting billions of dollars in capital spending in 2009. (Drill down into financial statements to tap into the right companies and let returns flow. Unearth Profits In Oil Exploration And Production.)