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EXCO Resources (NYSE:XCO) recently acquired 55,000 net acres and farm in rights for an additional 147,000 net acres from Chesapeake Energy (NYSE:CHK) in the Eagle Ford. The deal includes a complex partnership with Kohlberg, Kravis, & Roberts. The market doesn't seem to like the deal and has sold off EXCO Resources' stock, causing the company to accept the CEO's resignation. EXCO Resources has a current market cap of $1.1 billion.

But unbeknown to most, EXCO Resources could be sitting in the heart of the Buda sweet spot, as detailed in the article Contango Is Sitting On A Buda Oil Bonanza In South Texas. The Buda sits below the Eagle Ford and requires natural fractures to make commercial oil wells. These fractures occur near fault lines, and a large fault line called the Zavala Syncline runs along the Dimmit side of the Zavala and Dimmit border. Because the wells do not need expensive fracture stimulation jobs, they cost less than $4 million to drill and complete.

Dan A. Hughes Oil Company discovered the Buda sweet spot and so far the biggest beneficiary has been Contango (NYSEMKT:MCF), due to its recent acquisition of Crimson Exploration. Crimson had a 50% working interest in over 10,000 gross acres on the Booth-Tortuga lease located on the Zavala and Dimmit border. Crimson needed cash and sold a 30% working interest in the lease to a small oil company before Dan Hughes made the Buda discovery. The first Buda well drilled by Contango reached payback in less than 4 months. The third Buda well drilled by Contango has so far been quite a bit better than the first prolific well. The Heitz 302 Buda well drilled by Dan Hughes reached payback in six weeks.

Contango has added to its and its partners' Buda holdings by acquiring a 25% working interest in 4,200 gross acres with U.S. Enercorp (OTC:ENCP) located directly to the south of the Booth-Tortuga lease. The Willerson well is the first Buda well drilled on the new lease and while drilling the well they ran into the fault line.

According to Dan Hughes, the Buda formation is thicker to their west and thinner to their east. Contango is to the west of Dan Hughes and the fault line runs through its lease. A significant portion of the acreage EXCO acquired from Chesapeake is due west of Contango. They now own thousands of net acres and farm in rights to thousands of more acres due west of the Booth-Tortuga lease and right along the fault line.

Between Dan A. Hughes, Texas American Resources, Sage Energy, U.S. Enercorp, and Contango there have been 13 Buda wells drilled in the Buda sweet spot. The first nine all reached pay back in less than 6 months and the other four have only been producing for a few weeks. The best of the recent Buda wells so far is Contango's Beeler 4H well. The company reported "in October 2013, Contango's third well targeting the Buda formation, the Beeler #4H (50% WI), was drilled to a total measured depth of 11,350 feet, including a 3,777 foot lateral. The well was completed naturally without fracture stimulation, and commenced production at a peak 24-hour initial rate of 1,430 boed (84% oil), and a thirty-day average of 1,190 boed."

Wall Street had been asleep on the Buda discovery and just recently began buzzing about its opportunities in relationship to Contango. However, Wall Street is sound asleep on the Buda oil opportunity that EXCO Resources may have. With less than 6,000 net acres Contango could have 7 to 12 million barrels of recoverable and highly profitable oil. EXCO Resources has many more acres available to drill on than Contango and since they are to the west of Contango the Buda formation on their leases could be even thicker, and therefore sweeter.

Investors should be cautioned that while Contango is running a full time rig in the Buda it is not known how long it will be before EXCO Resources begins to exploit its significant opportunity. The company is in the process of replacing their CEO and they may need to get an agreement from Kohlberg, Kravis, and Roberts to drill a Buda well due to the complex partnership they entered into with them. However, opportunities to drill oil wells that pay back their invested capital in a few short months are few and far between in North America.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Source: EXCO Resources Could Be Sitting In The Buda Sweet Spot