In the middle of a peanut field near this tiny western Oklahoma town late in January, the Tom Cat #1 blew in with a roar that could be heard for miles around. For a time, the 15,335-foot deep well spewed 100 million cubic feet of natural gas a day into the air and, in the process, dramatically changed the fortunes of the Washington Gas Light Co.
Washington Gas had a 19 percent interest in the well. Overnight, it went from being "a standard gas distribution company with some regulatory problems in the District of Columbia," as one stock analyst put it, to a budding energy company with bright prospects. Within days, its stock price leaped from $18.50 to more than $40.
For once, all the furor over a stock appears to be justified. Before the Tom Cat discovery, which was drilled by the Ports of Call Oil Co. of Oklahoma City, mineral rights in the area could be leased for $500 an acre. Within 10 days of the discovery, that bonus leaped to $3,000 an acre, and precious little was available at any price. One local farmer who did agree to lease his 30 acres got a check for nearly $1 million.
No one knows how much gas there is in the Springer sandstone more than 15,000 feet below the surface of Caddo County here. There is talk of one trillion cubic feet, but until the Tom Cat is in production and other wells drilled, no reliable estimates can be made. But Tom Cat is big. Jim Niles, executive vice president of Ports of Call, says an "ultraconservative figure" for eventual production from the well is 10 million cubic feet a day. A single well that size would supply nearly 4 percent of Washington Gas' total needs.
Washington Gas has an interest in the mineral rights of 26 sections of land in the immediate vicinity of Tom Cat #1, interests that range from 1.6 percent to 25.1 percent. A section is 640 acres, or one square mile, and the Oklahoma Corporation Commission, which controls drilling there, allows one well per section if the drilling is to be as deep as the Tom Cat. A second well, the Kardokus #10-1, already is being drilled on the section northwest of Tom Cat. Washington Gas has a 9.6 percent interest in that one. The company also has agreed to participate in another four wells so far, according to President Donald J. Heim. Meanwhile, preliminary plans for drilling on still another four sections are under way in Oklahoma by Ports of Call and other companies.
Ironically, the target for the Tom Cat #1 was not the sandstone and shale of the Springer formation but that of the Hunton formation, which Heim calls "promising" but which lies about 5,000 feet deeper. For Washington Gas and the other investors in Tom Cat, however, 15,000 was the magic number. Natural gas from wells that deep, is, under the Natural Gas Policy Act of 1978, free of price controls -- which means that, currently, the gas can probably be sold for about $6.50 or $7 per thousand cubic feet (mcf) instead of about $2.75 per mcf.
When the well hit gas in January, the enormous pressure at the bottom pushed all of the drilling "mud" -- a mixture of clay and liquids used to lubricate the drill and the nearly three-mile-long string of turning drill pipe in the hole -- to the surface with explosive force. No one working on the drill rig was injured.
Initially, the force of the blowing gas was so great that the well could not be capped. Instead, pipe was laid on the surface of the ground to connect the well with three nearby pipelines. For a while, more than 70 million cubic feet of gas a day was sold on an emergency basis to the lines, and the remaining gas was flared, or burned.
However, the rush of gas soon caused the collapse of some of the shale layers in the Springer formation at the bottom of the hole. The impermeable shale gradually choked off the flow of gas and the well was capped. But the damage had been done. The bottom portion of the drill string was stuck fast.
From February until early this month, the drilling contractor tried to free the heavy collars -- 30-feet long pieces of pipe that weigh about 100 pounds per foot and are used to weight the drill bit so that it will cut into the rock -- by washing around them with drilling mud. When one or more came free, a small explosive charge was lowered and set off next to the point at which the freed collar and one still stuck were joined. From the surface, a light torque was applied to the string of drill pipe, which was attached to the top of the stack of collars. Like tapping a stubborn nut with a hammer to loosen it, the explosive charge jarred the junction of collars, which woulc then unscrew.
But the last five collars were too firmly stuck. So early in April, Ports of Call gave up, set a concrete plug at about the 12,500-foot level and started drilling a new hole at a slight angle to the sealed old one. At the end of last week, the new hole had reached 14,000 feet. Meanwhile, a mile away, drilling on the Kardokus #10-1 had hit 7,600 feet.
Suppose the Tom Cat eventually is put into production at that "ultraconservative" 10 million cubic feet a day. What would that mean to Washington Gas?
If the gas were sold for $6.50 an mcf, the income from the well would be $65,000 a day, or $23.7 million a year. The state of Oklahoma levies a 7 percent severance tax and a 0.085 percent excise tax that would amount to $1.7 million.The landowner normally gets a 3/16 royalty, which would be roughly $4.4 million a year. And, of course, there are some expenses associated with operating the well. Even if they were as much as half a million dollars annually, roughly $17 million would be left to be divided among the investors. With its 19 percent interest, Washington Gas would draw about $3.23 million from such a well. Oklahoma income taxes would take 4 percent of that, or about $130,000. Federal income taxes would slice off another $1.43 million, leaving the company $1.8 million.
Adding $3.23 million or so to Washington Gas' annual revenues, which last year were $464 million, would not make such difference to its stockholders. However, income from such a gas well, except for taxes, feeds directly to the company's bottom line. After taxes, such a well producing gas selling at such a price, could add 10 percent to the company's 1980 net income of $18.1 million.
Perhaps even more important to the stockholders, Washington Gas' investment in Tom Cat is through a wholly owned subsidiary, Crab Run Gas Co., which has been funded during its 10 year existence with stock-holder money. That is, the company's gas customers have not footed the bill through the rates they pay for gas, as they do for Washington Gas' investments in gas mains and other equipment.
Conversely, gas customers will not benefit from Tom Cat or other Crab Run wells through lower rates for gas. The stockholers get it all. Last year, adding $1.8 million to the net income applicable to common stock would have raised per share earnings from $3.51 to $3.91 for the 4.4 million shares outstanding.
If there is anything like one trillion cubic feet of gas in the field tapped by Tom Cat, or even half that, there would be considerably more than one well. And if the zone of faulted rock in which the gas is trapped runs anything like the geologists hired by Ports of Call think it does, Washington Gas will have a share in several of them.
"Crab Run started in the exploration business in 1973," says Heim. "We originally went into it because of the gas shortage. Now that's not a problem. It's more of an investment than a matter of supply. Whether we continue on depends on our success. I expect we will."
Until Tom Cat unloaded, however, Crab Run's operations had produced rather indifferent results. At first, the company concentrated on Louisiana, moving to Oklahoma in the mid-1970s. By the end of last year, Crab Run had invested a total of $17.7 million and had participated in drilling 42 wells, 26 in Louisiana, 14 in Oklahoma and two in Virginia.In addition, another aubsidiary, Hampshire Gas Co., drilled a single unsuccessful well in West Virginia last year.
Twenty-five wells turned out to have commercial quantities of gas. Only three of the Louisiana wells are still producing, while all nine of the successful wells in Oklahoma are still active. Last year, these wells produced 559 million cubic feet of gas and 21,751 42-gallon barrels of condensate (liquids extracted from the gas that are used by refineries or petrochemical plants). That production netted the company $577,000, considerably less than the potential of the new field. The remaining reserves of the 12 producing wells add up to 7.3 billion cubic feet of gas, according to the company.
Crab Run, which has only nine employes, mostly geologists and engineers, all of whom are based in Washington, acquired its leases in Caddo County in 1974 and 1975. They were five-year leases, acquired for Crab Run by Oklahoma speculators and wildcatters Clark Ellison and Buddy Appleby, have been renewed once.
Ellison's father, Kenneth, died in 1963, convinced that there were large quantities of gas buried deeply in the Anadarko Basin, the faulted trench of sedimentary rocks that in some places goes down 35,000 to 40,000 feet.Ellison was one of the pioneers of deep drilling in the basin. Clark Ellison and his partner picked up the mantle but never hit it big until Tom Cat. They had been trying for 12 years to interest someone in drilling on the Tom Cat site.Cliff Culpepper, president of Ports of Call, which was formed only in early 1980, finally agreed.
Ports of Call originally had 63 percent of the mineral rights on the Tom Cat section. All but 10 percent was sold by the company to other investors, who agreed to share in the well's cost, which has passed the $4 million mark. Such investments are attractive to high-income individuals because the drilling generates large tax write-offs. Crab Run had its 19 percent and Ellison and Appleby the remainder.
The Tom Cat strike will benefit Washington Gas in another major way. Even before the strike, the company had been planning its first new stock offering in 10 years for some time in 1981. Last week, it registered with the Securities and Exchange Commission an offering of an additional one million shares, which will be sold late in May. Before the filing, the stock price had drifted back down to 32 3/8, partly in the absence of any additional positive news from Oklahoma. It closed at 32 1/2 on Friday. But even at $30, the planned stock sale will net the company $10 million to $12 million more than if the strike had not been made and the per-share price were still below $20.
No other gas distribution company in the United States has come up with anything that looks as promising as the Tom Cat, says Merrill Lynch stock analyst Joseph Egan. "There is nothing like this. "It's the biggest strike I can recall" for such a company, he says. That the gas is deep and free of price controls, combined with the small number of outstanding shares, adds up to "a large impact on the bottom line.People get excited by wells like this," Egan declares.
And so they have. Now all that remains is to complete the Tom Cat and turn all those estimates into realities.