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Mississippian Lime Play: The New Bakken?

When a stranger stops into the local diner for breakfast in Kiowa, Kansas, people take notice. But lately in this rural town of 900 people, there have been a lot more new faces passing through, since the oil companies have made a push to drill here.

Oil Barrels
Oil Barrels

"We've been praying for economic development in this area for quite some time," says Brandon Farney, the town's mayor, whose family has farmed the same land just north of the Oklahoma border for five generations. "We're cautiously embracing this development."

Oil companies have been ramping up production in the Mississippian Lime formation, which extends from Northern Oklahoma into southwestern Kansas. It is an area where unconventional horizontal drilling is beginning to yield oil in fields where conventional wells have seen production decline.

Sandridge Energy's Tom Ward says oil output in the region by the end of the decade will grow to rival the production seen in the Bakken Shale in North Dakota, ramping up from just over 3.5 million barrels a month, to well over 18 million barrels of oil and gas. And with it, he expects a similar boom in economic development.

"Overall, the impact of Kansas, in our opinion, will be an additional 1000,000 jobs that will be coming in the next 15 years," Ward says.

"It's something that we have to get ahead of," says Miranda Wolz-Allen, of the Barber County Development Board, which is helping small communities like Kiowa in south central Kansas coordinate talks with oil companies about their expansion plans, in order to try work out growing housing needs for new workers.

Wolz-Allen says what these small towns here want is long-term jobs to reverse a decades long pattern of young people leaving the region to find work in bigger cities.

"Our goal is to make something that's sustainable."

THE MISSISSIPPIAN PLAY

Sandridge is the largest player in the Mississippian play, with more than 2 million acres spread over Oklahoma and Kansas. Chesapeake and Devon Energy are also drilling in the area and expanding into Kansas, along with RDS Shell.

Production in the state now is up 2.5 percent in the last year to about 3.5 million barrels a month, about the levels seen in North Dakota five years ago. Oil output in the Bakken shale is now up to 500,000 barrels a day, but analysts says the jury is still out whether drilling in Kansas will yield similar results.

"It's not comparable to the Bakken, because it's too much gas," says analyst John Gerdes of Cannacord Gennuity, who recently upgraded Sandridge to a buy, saying its cash flow looks to improve.

Gerdes says output from horizontal wells drilled in the Mississippian Lime is about 50 percent natural gas, whereas in the shale plays the crude ratio is much higher. With a glut of natural gas pushing the commodity's prices to 10 year lows, he believes the return on investment in the Mississippian wells won't be as rich, especially if Nymex crude oil prices remains substantially below $100 a barrel.

"That is the challenge we see with the play," says Gerdes.

Analyst Scott Hanold of RBC says so far results on the Oklahoma side of Mississippian have been impressive, but he expects the ramp up in Kansas will be a bit more moderate. In part, because of the success in other regions like the Bakken and the Permean Basin in Texas.

"Capital budgets are spread," he says, and when it comes to resources and personnel, "You are competing against those other areas."

Sandridge's Tom Ward is undeterred. He believes even with oil below $80, the Mississippian play will be a force in energy production.

"We're anticipating that peak production in the Mississippian Lime will be around 500,000 barrels of oil before 2020."

In Kiowa, they are hoping Ward is right. But they are also leery about things ramping up too quickly, and losing their quality of life.

"This is a very close-knit proud community," says Mayor Farney. "They take care of their own. People here aren't real flashy."

-By CNBC's Bertha Coombs
Follow Bertha Coombs on Twitter: @coombscnbc

Questions? Comments? Email us at marketinsider@cnbc.com

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