Michael Filloon wrote one of the most interesting, insightful articles ever on Seeking Alpha recently (link). In the article, he explains how EOG (NYSE:EOG) has pioneered an approach to fracking that yields substantially higher initial production rates and may also lead to higher expected ultimate recoveries from oil wells. EOG has applied this technique in the Eagle Ford, the Bakken and the Permian, and other operators are starting to implement some or all of the aspects of the technique in these areas.
The technique involves using substantially larger amounts of sand (proppant), as well as doing shorter, "wider" frac stages. Michael points out that this is very promising for U.S. Silica (NYSE:SLCA), because it provides frac sand that is used in this technique, and if more sand is used, there will be more demand for U.S. Silica's products.
The article also highlights the productivity differences between wells within a close proximity that use EOG's technique versus wells that don't. He shows well results from EOG in Gonzales county and compares them to well results by Penn Virginia (PVA) also in Gonzales county, in similar stages of the play (in the volatile oil window).
And in the article and in comments on the article, he shows how results for wells drilled by Whiting (NYSE:WLL) and Kodiak (NYSE:KOG) in the Bakken (and Whiting in the Niobrara) have started to improve as it appears they are starting to apply EOG's technique. This is meaningful because it shows evidence that the technique is already starting to be used by other companies and that the application applies to volatile oil windows of multiple plays.
Whiting may benefit substantially from this new technique. It recently announced a surge in production, driven partly by improving Bakken results (likely as a result of this improved frac technique) and at least somewhat by Niobrara production (also a likely beneficiary of this technique). And Kodiak seems to be benefitting in the Bakken, as its production is growing faster than guided, at least partly driven by improving well results (likely as a result of this improved frac technique).
As a value investor, I like to take insights like this and find undervalued companies with the highest leverage to improvements of this type. As I read Michael's article, I could not help but think of Lucas Energy (NYSEMKT:LEI), a stock I happen to already own. Lucas trades for ~1/3 of its proved reserve value, and those reserves were based on substantially lower well productivity assumptions than the results EOG has been getting with its new completion technique. Incidentally, a Wall Street Journal's Oil & Gas Analyst of the Year recently initiated coverage on Lucas with a $3 price target (versus a recent $1.25 stock price). Perhaps he saw what Michael Filloon saw with the improved Eagle Ford well results.
Marathon (NYSE:MRO) and Sanchez (NYSE:SN) are active in Gonzales county, which is where EOG and Penn Virginia have been drilling and where Lucas's acreage is. Michael mentions Marathon may have drilled at least one Eagle Ford well that uses the more frac-sand intensive frac technique, and Sanchez is in a JV with Marathon similar to Lucas, so both Marathon and Sanchez have the potential to benefit from improving Eagle Ford well productivity from this technique, even though they don't trade at a discount to proved reserve value like Lucas does.
In summary, EOG is applying a highly productive new frac technique, and other operators are applying that technique to nearby fields. It seems to be working best so far in the oily Eagle Ford and the Bakken. And Whiting and Kodiak seem to be benefiting already from a production perspective from applying the technique, Marathon, Sanchez and Penn Virginia may benefit from applying it in the Eagle Ford, and Lucas may offer the most torque from improved Eagle Ford results.
Disclosure: I am long LEI. 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.
Additional disclosure: Lucas is a small company, and investing in the stocks of small companies incurs additional risks. I was on the board of Lucas and left the board in March 2013 to pursue other endeavors. I have no ongoing business relationship with Lucas or any other company mentioned in this article.