The Barnett shale play, which some people credit with having kicked off the development of unconventional natural gas resources in North America, has slowly evolved into a mature shale play as operators direct capital toward higher-growth and less-developed areas. (For a primer on the oil industry, refer to our Oil and Gas Industry Primer.)
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Focusing on Oil
The Barnett shale is also undergoing other changes including shifting more toward oil production rather than natural gas. Oil was always present in the Barnett, as there has always been a well-defined "oil window" in the field, but operators concentrated more on the natural gas areas.
EOG Resources (NYSE:EOG), one of the early entrants in the Barnett shale, is developing what it calls its "Barnett combo" play. This combo play involves drilling acreage in Montague County, which produces a more balanced mix of oil, natural gas and natural gas liquids. The company believes that by 2012, almost half of its Barnett production will be from the combo play and will have a higher percentage of oil. EOG has 950 drilling locations in the combo.
In the first quarter of 2009, EOG Resources completed 12 wells in the combo.
Getting Out of The Barnett
Operators are also shifting away from the Barnett, although it's a little difficult to discern as the overall rig count is falling sharply in North America. However, a closer look at different shale plays shows the rig count rising in the Haynesville and Marcellus shales. Forest Oil (NYSE:FST) said that it reallocated resources in the quarter by shifting rigs from the Barnett to East Texas and the Haynesville shale.
Other operators are selling large stakes in the Barnett. Denbury Resources (NYSE:DNR) just sold 60% of its Barnett acreage to Talon Oil & Gas LLC, a private company, for $270 million. The company used the proceeds to pay down bank debt. Chesapeake Energy (NYSE:CHK) is also shopping around its Barnett assets, and will reportedly receive $500 million for one deal. Quicksilver Resources (NYSE:KWK) also just sold 27.5% of its Barnett properties for $280 million.
Another issue for the Barnett shale is that drilling has been moving into urban areas near Fort Worth, which creates obstacles to drilling. These include setbacks from residential structures, water issues and, in some cases, community opposition to drilling.
The Barnett shale has now become a "mature" shale play as exploration and production companies direct capital to higher-growth areas in North America. The play is also changing to a higher mix of oil as it expands northwest of Fort Worth. (Read Buy When There's Blood In The Streets, to learn how contrarian investors find value in the worst market conditions.)