Some Buda Wells In South Texas Outperforming Eagle Ford Wells

by: HiddenValueInvestor

Evidence is mounting that some Buda wells drilled in a sweet spot on the Zavala/Dimmit County lines in South Texas have better drilling economics than Eagle Ford wells. A previous article discussed the newly discovered Buda sweet spot and identified 3 Stocks With Lots Of Upside From A New Oil Discovery Underneath The Eagle Ford. The Buda is a naturally fractured oil formation located approximately 100 feet below the Eagle Ford. While a typical Eagle Ford well costs $7 million to $8 million to drill and frack, a Buda well costs less than $4 million because it does not have to be fracked.

A very sweet spot has been found in Northern Dimmit County by the private Dan Hughes Oil Company. It's success has been repeated by another neighboring private company, Sage Energy. The best Buda well to date drilled by Dan Hughes is the Heitz 302 3H well. Its Texas Railroad Commission information is District 01, RRC identifier no. 736515, classification pending. According to the Texas Rail Road Commission, the Heitz 302 3H well was still going strong and produced 16,220 barrels of light sweet crude oil in its 10 month of production in March 2013. The Heitz 302 3H well has now produced 216,371 barrels of light sweet crude oil in 10 months. The well has also produced a total of 130,055 mcf of natural gas. Dan Hughes has more than tripled its investment in the Heitz 302 3H well in less than one year.

The Heitz 302 3H well was drilled next to the Booth-Tortuga Ranch leased by Crimson Exploration (NASDAQ:CXPO), with a 50% working interest, and U.S. Energy (NASDAQ:USEG), with a 30% working interest:

The Beeler 2H Buda well was spudded by Crimson in early April and is almost complete. The results could be announced in mid-May. Neighboring Sage Energy recently completed the Sage Mills 1H well with an initial production of 959 Bopd and 541 Mcfpd. Crimson estimates it has 20 drilling locations on the Booth-Tortuga ranch at 320 acre spacing. Crimson believes its 50% working interest in the Buda wells can generate $82 million in net profits discounted back at 10% based on $90 WTI pricing. All 20 of these wells could be drilled in the next two years. With 44.3 million shares outstanding, the Buda discovery is worth close to an incremental $2 per share for Crimson. Crimson has recently entered into a merger agreement with Contango Oil & Gas (NYSEMKT:MCF). Should the merger close, Contango shareholders could also be a beneficiary of the discovery.

U.S. Energy's petroleum reserve engineers Cawley, Gillispie & Associates project the estimated ultimate recovery for each Buda well on the Booth-Tortuga Ranch is 325,000 Boe (95% oil). Compared to an expected 30 year production period for a typical Eagle Ford well, a Buda well normally produces 90% of its estimated ultimate recovery in the first two years, providing very high internal rates of return. Cawley, Gillispie & Associates estimate U.S. Energy's working interest in the Buda wells could be worth $70 million in PV10 value in proven reserves once all 20 wells are drilled. This would double the value of U.S. Energy's existing proven reserves.

Another big beneficiary of the Buda sweet spot is Chesapeake (NYSE:CHK), which has leased much of the acreage surrounding the Booth-Tortuga Ranch. Chesapeake has this acreage for sale as part of its Northern Eagle Ford Package, and the recent discovery should increase the price Chesapeake receives per net acre. Chesapeake stated on its first quarter earnings conference call that it is in the late stages of finalizing an agreement to sell this acreage. Other publicly traded companies with acreage in the area include Anadarko Petroleum (NYSE:APC), Matador Resources (NYSE:MTDR), and Sanchez Energy (NYSE:SN). It is not clear how far the sweet spot extends, and a close eye will need to be kept on all of these companies drilling results in the area.

Disclosure: I am long USEG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.