Chaparral Energy creates $100 million STACK joint venture with Bayou City Energy

Chaparral Energy's corporate headquarters in Oklahoma City, Oklahoma. (Photo by Paul B. Southerland, The Oklahoman Archives]

Oklahoman | by Adam Wilmoth | 09/26/2017

Oklahoma City-based Chaparral Energy Inc. and Houston's Bayou City Energy have agreed to a $100 million joint venture for 30 wells in Oklahoma's STACK play, the companies said Monday.

The deal includes 17 wells in Canadian County and 13 in Garfield County, with the ability to expand the partnership to include additional wells in the future. The companies already have begun drilling their first joint-venture well.

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​“We are pleased to announce our partnership with Bayou City, whose significant investment experience and success in the STACK is a further testament to the value and potential of Chaparral's Garfield and Canadian County assets,” Chaparral CEO Earl Reynolds said in a statement Monday.

“Their flexible E&P (exploration and production) investment platform and ability to execute on unique, operator-friendly transaction structures will allow us to accelerate our STACK development plans in both Canadian and Garfield counties, while maintaining our low-cost structure and corporate balance sheet,” Reynolds said.

Under terms of the deal, Bayou City will pay for 100 percent of the drilling, completion and equipping costs associated with the 30 wells with an investment of up to $100 million.

In exchange for funding, the Houston company will receive wellbore-only interest in each well totaling an 85 percent working interest until the program reaches a 14 percent internal rate of return. At that point, Chaparral will own a 75 percent working interest and Bayou City will retain a 25 percent working interest of Chaparral's stake in each well.

Chaparral will keep all of its acreage and reserves outside of the wellbore, with both parties paying lease operating expenses based on relative ownership interests.

“We are thrilled to partner with Earl Reynolds and his team at Chaparral in developing these targeted drilling locations in Canadian and Garfield counties,” Bayou City founding partner William McMullen said in a statement.

“Chaparral has demonstrated a track record of being a consistent, low-cost operator, while still being able to achieve high production rates and strong EURs (estimated ultimate recoveries)," McMullen said. "We expect the development program to deliver favorable economic returns even in today's challenging commodity price environment.”

Chaparral executives earlier this year outlined a new plan for the company with a focus only on the STACK following the company's emergence from Chapter 11 bankruptcy reorganization.

The company in the first half of the year leased an additional 18,000 STACK acres, boosting the company's holdings in the area to more than 110,000 net acres.

Along with increased production, Chaparral executives said they plan to boost capital spending for the year to $200 million, up from the earlier estimate of $185 million.

"While this represents a 30 percent increase in our guidance for the year, we fully believe the additional production, prime STACK acreage and geologic understanding we will gain are well worth the investment," Reynolds said in August during the company's second-quarter conference call with analysts.

The STACK is part of the Cana Woodford, which is home to 63 active rigs and is the country's third most active oil field. Drilling has ballooned in the area over the past two years.

As its name implies, the STACK is composed of several oil-producing layers stacked on top of each other. Companies have announced plans for up to 20 wells drilled from a single pad into different rock layers and in different directions.
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The multi-zone nature of the rock — along with other advantages including proximity to pipelines and service companies — has led new companies to move to the state and existing companies to increase their investment.