The shale oil fields most at risk

With crude prices down nearly 60 percent from their highs, investors are learning that not all oilfields are created equal.

U.S. oil production grew 49 percent between 2008 and 2013, as drillers improved productivity and tapped high-yield debt markets. But with their product fetching far less these days, exploration and production companies have slashed capital expenditure budgets and are being pickier about where they plumb for oil.

At current price levels, firms could take as many as 650 onshore rigs offline—or about one-third of the nearly 1,900 that were drilling at last year’s peak in November, Wells Fargo analyst David Tameron told CNBC’s “Power Lunch” recently. Last week, the U.S. rig count stood at 1,676, according to Baker Hughes.

Drillers have begun reducing rigs in big shale regions, including the Permian Basin in Texas and New Mexico, the country’s highest-producing region, as well as North Dakota’s Bakken Shale and the Eagle Ford in south and east Texas. But shutdowns in other, less productive and emerging areas will likely be more widespread.

The Tuscaloosa Marine Shale (TMS) has some of the nation’s highest breakeven costs—about $70 to $90 a barrel for benchmark West Texas Intermediate crude—according to energy investment banking firm Tudor Pickering Holt.

The TMS lies under a swath of the Deep South that runs along the border of Louisiana and Mississippi. While it is believed to hold 7 billion barrels of oil, that black gold is buried between 11,000 feet and more than 15,000 feet below the surface. That compares with depths as shallow as 5,500 feet in some parts of the Permian Basin.

Already, exploration and production companies are pulling out. Last month, Comstock Resources suspended drilling in the TMS, and Halcon Resources said in November it would wind down operations there.

Halcon recently slashed its drilling and completion budget roughly by half. The company has about 315,000 acres in the play and attracted $400 million in investment to drill there, according to its website.

“I’m going to do my darndest to make sure that people understand that we’re highly confident and we like the play,” Halcon CEO Floyd Wilson told investors on a conference call in November. “However, it is currently a relatively high-cost play, and with currently low crude prices we will not be devoting a significant portion of our resources to TMS in the near term.”

Another area that will definitely see cuts is the Mississippian Lime, said Michael Rowe, an analyst at Tudor Pickering Holt. Located in Oklahoma and Kansas, the play is comprised of a basin roughly the size of West Virginia. Producers need oil at roughly $75 a barrel to break even there.

MS Lime wells produce a lot of water, and regulations connected to the water use create additional labor, transportation and power costs, said Richard Tullis, energy equity analyst at Capital One Securities.