Robust oil prices continue to drive energy companies to pursue oil-weighted capital projects. Mature, vertically drilled oil plays have garnered particular interest as companies use current horizontal drilling and completion technologies to increase well economics. Existing vertical well data provides extensive reservoir control, enhancing the geologic and engineering model of the trend, thereby reducing investment risk. The Mississippian is an example of this development.

The Mississippian oil and gas bearing system is a proven, commercial trend producing from thousands of vertical wells for more than 50 years. The play area includes multiple counties on the Northwest Shelf of the Anadarko Basin in north-central Oklahoma and south-central Kansas.

The core of the current play involves drilling horizontal laterals in existing vertical wells or new horizontal wells primarily in Woods, Alfalfa and Grant counties along the Oklahoma-Kansas state line. The play is actively expanding, with more than 100 horizontal Mississippian wells drilled in the past two years as companies like SandRidge Energy Inc. and Chesapeake Energy Corp. have taken large acreage positions in the area.

Reservoir geology. The Mississippian oil trend is an expansive carbonate stratigraphic trap producing at shallow depths ranging from 4,500 to 7,500 feet. The reservoirs lie at the regional Pennsylvanian/Mississippian unconformity, as a result of uplift, alteration and erosion of shallow marine Mississippian carbonates.

The uppermost Mississippian member, called the "chat," is a widespread debris-flow deposit consisting of varying amounts of weathered chert, limestone and dolomite. It was formed through a combination of uplift and erosion of the Mississippian limestone.

The Mississippian "lime" underlies the chat and also exhibits excellent reservoir characteristics. It too was subjected to diagenesis and erosion at the regional unconformity. Porosity, generally between 10% and 20%, is best developed in the upper portion of the interval, including both the chat and lime, and can be more than 100 feet thick. This porosity development is the target of horizontal drilling. Permeability within the upper portion of the interval is very good as well, ranging from 1 to 2 millidarcies.

Operations and economics. Horizontal wells drilled in the play have lateral lengths of 2,500 to approximately 4,000 feet and are fracture stimulated with multiple stages. Reported well costs range from $2.5- to $2.8 million, including saltwater disposal systems, with per-well estimated ultimate recoveries (EURs) ranging from 300,000 to 500,000 barrels of oil equivalent (BOE).

Production from the Mississippian is 50% to 60% oil. With a relatively shallow target zone, oil-prone production, and attractive drilling and completion costs, the economics of the play are compelling. SandRidge estimates an internal rate of return of approximately 100% at current Nymex strip prices.

Competitor analysis. The horizontal Mississippian oil play is in its early stages of development, with relatively few companies aggressively developing the trend. Although the play centers on Woods and Alfalfa counties, its extent has not been determined and may ultimately expand across many additional counties in Oklahoma and possibly Kansas.

SandRidge Energy has been actively expanding its footprint in the Mississippian oil trend with approximately 650,000 net acres currently under lease. The company has completed more than 35 wells with excellent results and estimates that it has in excess of 3,000 potential drill locations (three wells per section). The company plans to drill more than 100 Mississippian wells in 2011 with a nine-rig program.

SandRidge's published type curve is 409,000 BOE with expected well recoveries ranging from 300,000 to 500,000 BOE per well. The cost to drill and complete a SandRidge well, including saltwater disposal facilities, is approximately $2.7 million.

On January 5, SandRidge announced that it would monetize a portion of its interest in the Mississippian oil trend through the initial public offering (IPO) of SandRidge Mississippian Trust I. SandRidge expects proceeds of up to $250 million for a 49.4% interest in 42,600 net acres in northern Oklahoma. Applying the full value of the proceeds to the acquired acreage implies an acreage metric of nearly $12,000 per acre. Assuming a multiple of $15 per BOE for the proved reserves acquired, the IPO values the undeveloped portion of the Mississippian acreage at about $5,900 per acre.

Chesapeake Energy has also been active in the Mississippian oil trend with approximately 230,000 net acres in the play. The company's primary focus has been Woods and Alfalfa counties, where it has drilled several wells with very positive results. The company has drilled more than 30 horizontal wells in the trend, with its first well completion in 2007. Chesapeake plans to drill approximately 40 wells in 2011 using four rigs.

Chesapeake's published type curve is 360,000 BOE, with costs to drill and complete wells, including a saltwater disposal facility, of approximately $2.8 million. Its current production from the region is approximately 3,000 BOE per day. One of Chesapeake's most interesting recent wells had an initial production rate of 1,609 BOE per day.

Other operators in the play include Ceja Corp. (approximately 20 wells), Eagle Energy Co. of Oklahoma LLC (10 wells and some 40,000 acres), EOG Resources Inc. (five wells), Chaparral Energy Inc. (66,000 acres), Ram Energy Resources Inc. (53,000 acres) and Red Fork Energy Ltd. (12,000 acres).

—Tim Pish and Thomas McDermott (713-222-0546), Scotia Waterous