HOUSTON—On the surface, EnLink Midstream LLC paid $1.55 billion for subsidiaries of Tall Oak Midstream LLC in January and, one month later, the company’s market capitalization had slumped to only $1.3 billion.

But it’s the subsurface that drives this purchase and, as Citigroup Inc.’s Jeff Sieler explained at the recent NAPE business conference, the qualities involved in this transaction, well, rock.

“There’s a line item in there that says 1,000 drill locations,” said Sieler, who is managing director and co-head, U.S. energy A&D. “The reality is, it’s double or triple that, just on the acreage.”

In the greater area of Oklahoma’s Sooner Trend Anadarko Basin Canadian and Kingfisher Counties (STACK) and Central North Oklahoma Woodford (CNOW) plays, figures will approach 11,000 unrisked drill locations and around 5,000 risked locations, he said.

“Those are really stellar numbers,” Sieler said. “I think the thing that stood out to our subsurface team as we worked this particular set of assets was the economic robustness that we saw associated with it.”

The best-known formations involved are the Woodford and Meramec, with Tall Oak’s midstream assets on acreage located over the core of the play. The acreage is operated by Felix Energy, a Denver-based E&P that was acquired by Devon Energy Corp., EnLink’s general partner, as part of a $2.5 billion deal announced in December.

The midstream assets are strong and include:

  • Pipeline systems of more than 200 miles in the STACK and 75 miles in the CNOW with capacity of 175 million cubic feet per day (MMcf/d) and the flexibility to expand to over 1 billion cubic feet (Bcf/d);
  • Fee-based contracts that average terms of 15 years; and
  • New, state-of-the-art cryogenic processing plants with 175 MMcf/d of capacity and the ability to expand to 700 MMcf/d.

Sieler, who was trained as a petroleum engineer and worked for Shell, Kinder Morgan Inc. and Marathon Corp. before moving into the A&D side of the business, acknowledged that “sweet spots” in plays tend to change over time, but being positioned to handle growth in the play is a plus.

And the play is growing. Not all rigs pulled from unconventional operations around the country are stacked up—some are being relocated into the STACK.

From May to August of last year, the number of rigs moving into Kingfisher and Canada counties rose 50% from 22 to 33. Houston-based Newfield Exploration Co. has indicated that it can position as many as 24 wells in the STACK area, what Sieler called “a remarkable number” in the Meramec and Woodford.

The boomlet is propelled by economics: the breakeven price for a barrel of oil in the stacked Meramec is less than $20, creating unusually happy margins during a time when WTI struggles to stay in the $30s. That’s possible because of the unique subsurface characteristics at play in the region, characteristics that caught the attention of the Citi team last year as it analyzed the transaction for its client.

The internal rates of return that Citi identified in the STACK were the best to be found in the Lower 48, Sieler said. The area had been studied by E&Ps and there was plenty of data to confirm the analysis that the 500-foot thicknesses associated with Mississippian rock in the Meramec and Osage plays made for ideal landings for horizontal laterals. Underlying that was the world-class Woodford, with porosities in excess of 10% total organic content (TOC).

To the northeast was the CNOW, an oil-rich area with good economics as well. Resource potential includes 52 trillion cubic feet of natural gas and at least 20 oil wells with 1 million barrels of oil equivalent. Tall Oak’s infrastructure area totaled 430,000 acres, meaning plenty of opportunity to expand.

“That infrastructure is sitting not only on top of the rock thickness but sitting on top of the fluid mix that is the most productive and is the most economic two-phase flow stream,” Sieler said. “Felix is sitting on a central location to where pipes are located.”

The more the Citi subsurface team scrutinized the area involved in the deal, the more it found elements to warm the cockles of an energy investment banker’s heart: growing rig count, shallow decline rates of 61% to 63%, access to liquids-rich gas, close proximity to downstream markets.

Finally, a burst of efficiency by applying lessons learned in earlier plays.

“What I saw going into the Eagle Ford was literally hundreds of millions of dollars of development, millions and millions of dollars of research, not only by the operators there but by the service companies,” Sieler said. “I looked at the STACK and one thing stands out to me: many of these industry-leading unconventional operators are taking their best practices and applying them faster.”

There are fewer economic drill locations because commodity prices are low and the widespread assumption in the industry that they will remain so. That’s why plays like Tall Oak that excite upstream companies will excite midstream companies as well.

“Midstream is underpinned by long-lasting forecasts with certainty,” Sieler said. “That’s what is guiding midstream, so everything is attached to itself in one form or another.”

Joseph Markman can be reached at jmarkman@hartenergy.com.