LITTLE ROCK — The world’s largest money manager has increased its stake in several companies that stand to make a lot of money if drilling in the Lower Smackover Brown Dense oil formation in south Arkansas and north Louisiana proves successful.
According to filings made public Monday by the U.S. Securities and Exchange Commission, New York City-based BlackRock Inc., which has $3.5 trillion in assets under management, in December increased its holdings to 5.66 percent of Southwestern Energy Co. outstanding stock and nearly 6 percent of Cabot Oil & Gas Corp.’s stock. Both Houstonbased companies are drilling in the Brown Dense.
Southwestern has more than 347 million shares outstanding, while Cabot had 104.2 million shares outstanding as of its annual stockholders meeting last year.
Southwestern Energy, the top producer in the naturalgas producing Fayetteville Shale of north-central Arkansas, announced in July that it had spent $150 million leasing about 500,000 acres in south Arkansas and north Louisiana. Steve Mueller, chief executive officer at Southwestern, said last week that there could be 3 billion barrels of recoverable oil underneath that 500,000 acres.
If true, it could be a significant development for oil exploration in the U.S.
“For the industry, the Brown Dense is another large potential play that could add a meaningful amount of oil reserves in the U.S.,” Raymond James energy analyst Andrew Coleman said.
The Brown Dense is part of the old Smackover formation, which in the 1920s produced one of the first U.S. oil booms.
The companies are hoping horizontal drilling and hydraulic fracturing, or fracking, will allow them to tap the Brown Dense. The technique has unlocked vast amounts of oil and natural gas in formations around the U.S.
Fracking is the process of injecting millions of gallons of water, mixed with sand and chemicals, into a well to release minerals from a formation. Besides Southwestern and Cabot, Devon Energy Corp. of Oklahoma City and Irving, Texas-based XTO Energy, a subsidiary of Exxon Mobil, are drilling in the Brown Dense.
In addition to Southwestern and Cabot, BlackRock bought a 5.4 percent stake in Exxon. However, Exxon has operations all over the world, making it harder to tell whether the purchase is Brown Dense related, analysts said.
BlackRock also bought 7.23 percent of El Dorado-based Deltic Timber Corp. stock, which has leased 14,000 mineral acres to companies exploring the Brown Dense. Wellington Management Co. of Philadelphia, one of the largest money managers in the country, also has bought a 7 percent stake in Deltic.
A spokesman for Deltic had no comment Tuesday.
BlackRock also bought a 5.73 percent stake in a second timber company, Plum Creek Timber Co. of Seattle, that has about 1 percent, or 7,747 acres, of its 747,000 acres in south Arkansas leased for oil and gas drilling. Federal rules require disclosure when holdings reach 5 percent in a company.
BlackRock bought some shares of Southwestern, Cabot, Deltic and Plum Creek in September, but in December it increased those holdings to more than 5 percent.
BlackRock spokesman Jessica Greaney would not say if the purchases are related to the Brown Dense. However, Coleman thinks there is a connection.
“You’ve got ... a growing list of high-quality players in the area, and it sounds like you’ve got a growing list of higherquality investment funds in the area,” Coleman said. “Where there is smoke, there is fire.”
Still, more information needs to be established before it can be confirmed that there is more than 3 billion barrels of recoverable oil in the Brown Dense.
While Southwestern’s stock price has improved slightly since announcing how much recoverable oil it might be sitting on, the stock has not jumped as much as it will if the Brown Dense is actually economical, said Will Green, an energy analyst with Stephens Inc.
Should the Brown Dense have more than 3 billion barrels of recoverable oil, it would be on par with the Eagle Ford Shale in south Texas and the Bakken Shale, which includes parts of Montana and North Dakota and extends into Canada. The U.S. Energy Information Administration says there are about 3.5 billion barrels of recoverable oil in each formation.
“Investors want to see proof,” Green said. “Proof of not only the first well working, but repeatability. Even in some of these more established oil plays, bigger oil plays like the Eagle Ford, the Bakken or the Permian Basin, sometimes questions linger even after a number of results have been shown.”
Southwestern’s stock opened at $32.90 on Thursday, when Mueller said there could be 3 billion barrels of recoverable oil. On Tuesday it closed at $33.60. The stock has not gone below Thursday’s open since Southwestern revealed the information.
Green said there are early questions about well completion techniques and geological characteristics.
Mueller said Southwestern’s first Brown Dense well in Columbia County is starting to produce, but didn’t say how much oil was flowing.
“I get asked all the time, ‘What would make you excited from a production rate on that well?’” Mueller said Thursday at the Credit Suisse Energy Summit in Vail, Colo. “If we could get a 100-barrel-aday rate out of this well, I’d be jumping up and down. What you really need to have to make economics work on what we think will be an $8 million well, ultimately, is between 400 and 500 barrels a day.”
Mueller said Southwestern used completion techniques similar to its wells in the Fayetteville Shale, but that for future wells it will use methods that have made the Eagle Ford and Bakken so successful. Mueller said more information about Southwestern’s first well will be available when the company releases its fourth-quarter earnings report Feb. 27.
Meanwhile, Cabot Oil & Gas filed a permit application Feb. 2 with the Arkansas Oil and Gas Commission to burn off natural gas as it tests its well in Union County. Burnoffs are an indicator of ongoing drilling. Cabot has not released any additional information about the Brown Dense and a spokesman did not return a call Tuesday.
Coleman said BlackRock might be buying into the formation early to try to cash in on the potential.
“[BlackRock] certainly has a good reputation for being good stewards of capital and being savvy stock pickers, so they might even be willing to buy in a bit earlier,” Coleman said.
Green, a Stephens analyst based in Dallas, said if the Brown Dense is successful, Southwestern’s stock could improve dramatically.
“If you can meaningfully extract oil from south Arkansas in a play like the Brown Dense, and if it ends up working like they hope it will, then it can really begin to move the needle positively on the margin and cash flow side,” Green said. “At this point all eyes are focused on what could happen.”
Business, Pages 27 on 02/15/2012