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In a press release issued yesterday, ZaZa Energy Corporation (NASDAQ:ZAZA) announced that it has formed a joint venture "with one of the largest independent crude oil and natural gas companies in the United States" to develop ZaZa's Eaglebine assets. ZaZa's mystery JV partner (the press release did not provide the name) is EOG Resources (NYSE:EOG).

ZaZa Energy holds a significant 100,000-acre (73,000-acre net) lease position on the eastern side of the Eaglebine play. The acreage is largely contiguous with high working interest but is largely untested (ZaZa's acreage is shown in yellow color code on the picture below; EOG's acreage shown in red).

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(Source: ZaZa Energy December 2012 Investor Presentation)

Many large-cap and small-cap operators are active in the play. Acreage in the Eaglebine area is substantially leased up, with much of the acreage held by legacy production.

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(Source: Halcon Resources Investor Presentation)

The Eaglebine is a shorthand term for a complex, stacked pay horizontal oil play in the East Texas Basin which combines conventional Woodbine Sands and unconventional Eagle Ford Shale formations.

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(Source: ZaZa Energy DUG 2012 Presentation)

The play has recently seen a strong increase in drilling activity targeting both conventional and unconventional oil concepts with horizontal drilling techniques. My earlier note "How Big Is The Eaglebine Oil Play?" provides a brief overview of the play.

Horizontal drilling activity in the area to date has focused mostly on the Woodbine Sands, with many highly productive wells reported. Strong well economics have encouraged operators to increase their drilling budgets. For example, Halcon Resources (NYSE:HK), one of the most active drillers in the play, plans to spend approximately $490 million on its Eaglebine program in 2013 and will run 5-7 operated rigs targeting mostly the Woodbine Sands.

More recently, the industry's activity has turned its focus towards the Lower Eaglebine unconventional laminated shale targets. The lower laminated play is at a very early stage of evaluation. However, the assessment activity in this zone is quickly increasing, with several operators targeting this zone. Two successful wells -- Crimson Energy Partners' (private) Jackie Robinson 4H and Weber Energy's (private) Lewis 1H -- have been often quoted in the industry. Both wells IP'ed at around 600 bo/d and validated the thesis regarding potential producibility of this oil shale. Encana Corporation (NYSE:ECA) has been among the large cap E&Ps zooming in on the Lower Eaglebine, with one dedicated rig running since July 2012.

EOG Resources has also been testing various concepts in the play, however has a relatively small acreage position in the area. The joint venture with ZaZa gives EOG a low-cost option to evaluate the play and, if results prove positive, earn a meaningful acreage position.

Under the terms of the Joint Venture agreement, EOG will become the operator of the properties and will carry ZaZa on up to the first nine wells and make cash payment to ZaZa of up to $50 million to earn up to 75% interest in up to 55,000 net acres. Neither ZaZa's press release nor the 8-K filing specify the zones that the joint venture plans to test. However, assuming, for illustrative purposes, that drilling results turn positive and the nine wells will cost $10 million each (high estimate due to significant amount of geo-science work involved), total consideration in the transaction would be less than $2,000 per acre, a modest amount for a "hot" horizontal oil play.

Details Of The Agreement

ZaZa's Eaglebine trend properties subject to the JV agreement are primarily located in Walker, Grimes, Madison, Trinity, and Montgomery Counties, Texas. ZaZa owns a 100% working interest in the majority of the acreage. Part of the acreage is currently owned 75% by ZaZa and 25% by Range Resources (NYSE:RRC). Under the JV agreement with EOG, in those parts of the acreage where ZaZa has 100% working interest, ZaZa will retain a 25% working interest while EOG will earn a 75% working interest. In those parts of the acreage where ZaZa holds 75% working interest, ZaZa will retain a 25% working interest, EOG will earn a 50% working interest, and Range will retain a 25% working interest. ZaZa will retain 100% interest in the 19,000 net acres in the middle of the block adjacent to recent producing wells.

This joint development will be divided into the following three phases.

PHASE I

In the first phase, ZaZa will transfer 20,000 net acres - approximately 15,000 of which will come from its joint venture with Range - to EOG in exchange for a $10 million cash payment and an obligation of EOG to drill three wells and pay 100% of those wells' drilling and completion costs. Drilling operations on the third well in the first phase must be commenced by EOG before December 31, 2013.

PHASE II

Within 60 days of completion of the third well under the first phase, EOG will have the option to elect to go forward with the second phase of the joint development or to terminate the joint venture. If EOG elects to go forward, ZaZa will transfer an additional 20,000 net acres to EOG in exchange for a $20 million cash payment, an obligation of EOG to drill an additional three wells and pay 100% of the drilling and completion costs of those three wells, and an obligation of EOG to pay for up to $1.25 million of ZaZa's share of additional costs for seismic or well costs.

PHASE III

Within 60 days of completion of the second phase, EOG will have the option to elect to go forward with the third phase of the joint development. If EOG decides to proceed, ZaZa will transfer an additional 15,000 net acres to EOG in exchange for a cash payment of $20 million cash payment, an obligation of EOG to drill an additional three wells and pay 100% of the drilling and completion costs of those wells, and an obligation of EOG to pay for up to $1.25 million of ZaZa's share of additional costs for seismic or well costs.

Conclusion

The announcement of the joint venture between ZaZa and EOG is a positive development for the play, although perhaps of a smaller magnitude than the headlines appear to suggest.

EOG is no novice as it comes to complex horizontal oil plays, and its interest in the Eaglebine certainly sends a positive signal. EOG's Eagle Ford expertise is particularly important in the Eaglebine context.

At least three test wells will be drilled by EOG before 2013 year end on ZaZa's acreage. In the event of a positive result, drilling activity can be accelerated.

However, it would be premature to read much into the announcement. EOG is paying a relatively low price for its option to test the acreage and would be able to exit the Joint Venture after three wells should the results disappoint.

Disclaimer: This article is not an investment recommendation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.

Source: Eaglebine Oil Play: EOG Resources Forms A Joint Venture With ZaZa Energy