Buda Oil Well Rates Of Return Better Than Eagle Ford

|
 |  Includes: CHK, MCF, USEG, USO, XCO
by: HiddenValueInvestor

Summary

The Internal Rates of Return for Buda oil wells are outperforming Eagle Ford Wells.

In the Buda Sweet Spot on the Zavala/Dimmit border some wells reach payout in 30 to 60 days.

The biggest publicly traded beneficiaries are U.S. Energy (USEG), Contango (MCF), and EXCO Resources (XCO).

The Buda sweet spot on the Zavala/Dimmit border in South Texas was discovered by Dan A. Hughes oil company, which unfortunately is not publicly traded. The Hughes company believes natural fractures in the Buda, which lies below the Eagle Ford, occur near fault lines. Hughes drilled four very prolific Buda wells on the Zavala/Dimmit border. One well, the Heitz 302 3H, has produced almost 400,000 BOE since it started producing in 2012. Because of the natural fractures Buda wells don't always require expensive fracture stimulation methods like Eagle Ford wells and therefore cost less to drill and complete.

It just so happens that the area U.S. Energy (NASDAQ:USEG), EXCO Resources (NYSE:XCO), and Contango (NYSEMKT:MCF) have acreage in sits on top of ancient underground volcanoes with multiple fault lines. An academic paper by Truitt F. Mathews details the geology of the area. One aspect is a major fault line, known as the Zavala Syncline, runs very close to and potentially right under the Booth-Tortuga lease. The Zavala Syncline splits like a wishbone starting about 10 miles west of Frio County near the border of Zavala and Dimmit Counties. One leg runs due west just south of the Zavala County line and the other leg heads northwest up through Zavala County.

Contango and U.S. Energy have a 50% working interest, and a 30% working interest, in the Booth-Tortuga lease respectively. The lease sits just to the west of the Hughes' lease. This week they released the results of their most recent Buda wells.

  • "The Beeler Unit A #9H well was spud on March 26, 2014. The well was completed naturally without fracture stimulation and commenced production in late April 2014. The well had a peak early 24-hour flow back rate of 883 BOE/D and a 30 day average production rate of 326 BOE/D (~53% oil).
  • The Beeler Unit D #16H well was spud on April 18, 2014. The well was drilled to a vertical depth of approximately 7,000 feet with dual laterals of approximate 4,000 feet each. The well was completed naturally without fracture stimulation and commenced production the second week of June 2014. The well had a peak early 24-hour flow back rate of 1,083 BOE/D (~89% oil) and a 30 day average production rate of 723 BOE/D (~78% oil).
  • The Beeler #17H well was spud on May 13, 2014. The well was completed naturally without fracture stimulation and commenced production the second week of June 2014. The well had a peak early 24-hour flow back rate of 1,326 BOE/D (~88% oil) and a 30 day average production rate of 1,109 BOE/D (~87% oil).
  • The Beeler Unit F #19H well was spud on June 10, 2014. The well was completed naturally without fracture stimulation and commenced production the second week of July 2014. The well had a peak early 24-hour flow back rate of 1,458 BOE/D (~78% oil) and during the first 28 days of production the well had an average production rate of 1,204 BOE/D (~80% oil).
  • The Beeler 8H well was fracture stimulated with 12 stages during the third week in June 2014. A production increase was not realized as a result of the stimulation and it is theorized that the nearby fractured zones were depleted by an offsetting well. The well is still producing however, and the operator continues to monitor the well's performance.
  • The Beeler Unit C #20H well was spud July 3, 2014. The well was drilled to a total depth of 16,574 feet, which included an approximate 9,474 foot lateral, the longest lateral to date in the program thus far. The operator continues to monitor the early production data from the well, which is comparable to the early flow back results of the Beeler #17H well.

The Beeler # 17H, Beeler Unit F #19H and the Beeler Unit C #20H well costs have been approximately $2.6 million per well."

According to Contango's Thomas H. Atkins "In terms of the rate-of-return expectation, we're making a very good rate of return, 100% or greater as a project. So, obviously, the good wells pay out in 30 to 60 days and that's carrying the project forward."

Contango and U.S. Energy experienced a 32% growth rate in Buda production in the second quarter over the first quarter. That was with less than one month of production from the Beeler 16H and 17H and no production in the second quarter from the Beeler 19H or 20H. Third quarter production growth in the Buda is poised to be even higher based on their recent well successes.

EXCO Resources has thousands of net acres prospective from the Buda just to the west of the Booth-Tortuga lease and along the Zavala Syncline fault. They acquired these acres from Chesapeake Energy (NYSE:CHK) which was forced to shed assets to reduce debt. Chesapeake still has tens of thousands of net acres to the south of the Zavala Syncline and has recently submitted a permit application to drill its first Buda well.

Wall Street analysts have been slow to pick up on the success in the Buda because U.S. Energy and Contango are not widely followed. Once EXCO Resources and Chesapeake start drilling and reporting on the Buda all of that will change. Investors still have an opportunity to position themselves in U.S. Energy, Contango, and EXCO Resources before the analysts figure out just how sweet the spot they are sitting in is with Buda oil.

Disclosure: The author is long USEG, MCF, XCO. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.