EOG (NYSE:EOG) filed a report with the Texas Railroad Commission recently (link), showing a 8,650 boepd 24 hour initial production rate, of which over 7,500 bopd was oil. To understand the scale of this well, assuming an 80% NRI and $100 oil (oil is at ~$105 right now), the well produces $600,000 per day in net revenue, vs. a total cost to drill and complete the well of ~$6 million.
As can be seen in the above slide from EOG's presentation, EOG sees an NPV of $98 million per 640 acre unit, assuming wells that have substantially lower than 8,650 boepd IP rates. This new massive well helps confirm that level of value and improves the chances that the NPV of land in the area continues to rise.
In the below slide from EOG's presentation, EOG shows a map of recent well results. It does not include the most recent massive well, which is located in the North East in Gonzales county, near some of the other largest wells. The value impact on land (and stocks) in the Eagle Ford of the recent massive well will most likely be felt on land and companies in the nearby area.
Companies active in the nearby area include Sanchez (NYSE:SN), Marathon (NYSE:MRO) and Lucas Energy (NYSEMKT:LEI). Marathon holds a substantial position in Gonzales, although as a $26 billion company this may not move the needle for them. Sanchez holds a more limited sized position, but as a considerably smaller $800 million market cap company, this will be more impactful to them. And Lucas holds an even smaller position, but as a $36 million company, this will likely be most impactful to Lucas.
Above, you can see a map of Marathon's Eagle Ford holdings. In the top right, you can see their position in Gonzales County, where the 8,650 boepd well was drilled. And below, you can see a map of Sanchez's holdings - the central 9,500 net acre position in Gonzales is in proximity of the EOG well.
Below, you can see Lucas' Eagle Ford acreage position. As you can see, their land is immediately adjacent to EOG's position. It is interesting to observe the large number of wells drilled by EOG immediately offsetting Lucas' land.
I emailed Lucas' CEO and asked the distance from EOG's 8,650 boepd well and Lucas' Gonzales acreage, and he said it was 8 miles. This is consistent with research analysts saying the well was 6 miles from Sanchez and Marathon's acreage (no link, as their reports weren't made publicly available but were sent out to their clients, and I got emails from at least two investment banks regarding this well and the implications for nearby companies).
There was recently a negative article published about Lucas, apparently in response to an article I wrote last week focusing on Lucas' discount to its proved reserve value. This massive EOG well highlights the relevance of Lucas' proved reserves, as the close proximity to this well and other fantastic Eagle Ford wells being drilled by EOG helps de-risk Lucas' position and validate their reserves. Great wells being drilled by Marathon (Lucas' JV partner) and Sanchez (which is also in a JV with Marathon structured similarly to Lucas' JV) also help de-risk Lucas' acreage and increase the probability that it gets developed, either by Marathon or by Lucas. For example, see the below slide which shows South Barnhart, which is only a few miles from Lucas' acreage, where well results have improved 33% since Marathon started operating in the area (Marathon's estimate).
The negative article highlighted Lucas' debt position (just over $3 million) and its negative working capital position (roughly $5 million). However, it missed that Lucas has retired $22 million in debt and extinguished another $5 million in other liabilities in the past 6 months, while only selling ~$4 million in properties and producing at lower levels and at a lower oil price than the current oil price. Clearly management has a handle on the asset vs. liability situation, and fantastic nearby well results will only further improve Lucas' financial maneuver-ability. Lucas management's recent achievements are highlighted in the below slide from their recent presentation:
The negative article also addressed Lucas' high % of PUD vs. PDP reserves. Obviously this is not a positive, but it is not terrible considering Lucas' proved reserves seem to have been booked based on results of offsetting wells. As wells like this 8,650 boepd well come online adjacent to Lucas' acreage, they demonstrate the prospectivity of Lucas' land and increase the probability of success of wells on Lucas' land, as well as the likely sale value of the land.
The article also takes issue with the interest rate on Lucas' ~$3 million of debt. Considering the considerable changes Lucas' management has made to its liability situation, it is understandable that higher interest debt might have been appropriate prior to these improvements. I expect that in the refinancing of that debt, a far lower interest rate will be paid. I expect that banks oriented to lending to smaller oil and gas companies will be very interested in lending more than the current ~$3 million Lucas currently has borrowed. A partnership I am invested into in the liquids-rich Marcellus recently lined up more than $3 million in sub 4% interest bank debt on non-operated production of approximately 132 bopd - with 200 bopd, we could potentially have borrowed significantly more. And Lucas' margins have been improving recently with G&A cuts, further improving the likely availability of bank financing.
So in summary, EOG recently drilled the best well in the Eagle Ford play in close proximity to land held by Marathon, Sanchez and Lucas. Marathon and Sanchez have themselves been seeing an improvement in well results in the area, with Marathon's results improving by 33% in the past ~2 years. And Lucas may be a disproportionate beneficiary of improving well results in the area, given its exposure to the area relative to its small size.