Ways to Play the Eagle Ford

by: Michael Filloon

When looking at oil shale plays in the United States, the Bakken/Three Forks comes up first, due to the size of its reserves and the activity in the area. These assumptions may be right, but there are other shales in the United States that have huge upside potential.

The Eagle Ford may be another play that could have better short term upside. Don't get me wrong, I still believe the Bakken is the best shale play in the United States, but some wells will pay out differently. Bakken wells tend to be very complicated to drill (at least to get the best possible outcome), but they also have very large amounts of resources to be pulled from the ground. Bakken wells have averaged anywhere from 90% to 97% liquids, give or take a few point. It can also cost upwards to $9 million or more to drill a well in the Bakken.

The Eagle Ford is not just a liquids play, as much of the Bakken is. The Eagle Ford has what is called an oil window, a wet gas window and a dry gas window. Depending on where the company's acreage is, there could be a completely different makeup of resource, due to the unconformity of the formation. The Eagle Ford's geology is still considered by many to be a moderate oil producer, and is very easy to drill. This is why many of the companies in this space have average well costs of around $3 million. Although a Bakken well will create much more resource and revenue through production, the lower upfront cost decreases the time from which it becomes profitable.

There are several ways to play the Eagle Ford. I have compiled a short list of names that could benefit significantly from Eagle Ford exposure. I decided I had to thin the list out somewhat, and in the process removed several big names, such as EOG Resources (NYSE:EOG) with 600,000 net acres. I tried to go with companies that are significantly levered to the Eagle Ford, and for whom production from it will be a very high percentage of company revenue and/or growth.

The first name on my list is SM Energy Company (NYSE:SM). I placed this company first not because I believe it will outperform the others on my list, but because it was the largest by market cap. I previously highlighted SM based on its overall assets here, and on its Bakken assets here.

SM has 250,000 net acres in the Eagle Ford, with the majority in the liquefied natural gas and oil windows. Currently there are two rigs running here, increasing to six sometime this year. SM Energy will be spending a large portion of its capex in this play. It seems to think there is substantial upside in the Eagle Ford based on the much lower well cost then that of the Bakken.

There has been much talk of SM being cheap at current prices due to its exposure to prolific liquids plays. SM is up 36% the last three months and has almost doubled over the past year. As oil names pull back in the short term, this company could be a great buy, so watch it closely for a good entry point.

Rosetta Resources (NASDAQ:ROSE) owes a pretty good year to the Eagle Ford. Rosetta has stated its Eagle Ford position has been a low-risk/moderate-reward play. Of its 2011 capex, Rosetta will spend 90% of the $360 million on the Eagle Ford. Of its almost 65,000 net acres, Rosetta is getting about 77% liquids. Rosetta has plans for 40 wells to have fracture stimulation done.

Since 2007, Rosetta has increased development of the Eagle Ford significantly. In 2007, it had 5,000 net acres with Eagle Ford potential. Last year Rosetta had 65,000 acres with 22 horizontal completions. Rosetta will have 18 years of inventory at this location. Even though this is a play on the Eagle Ford, take a look at its possibilities in the D-J Basin.

Carrizo Oil and Gas (NASDAQ:CRZO) has 20,000 acres in the Eagle Ford shale. Carrizo's acres are in the oil portion of this play. Carrizo is not as levered to the Eagle Ford but is planning an aggressive development plan. Carrizo has 61,000 acres in the Niobrara and 47,000 acres in the Barnett. All three of these areas are being worked as this company tries to get more oily.

Since the Barnett and Eagle Ford are lower risk, we will probably these developed at a quicker pace. Last year, Carrizo drilled five wells and fracture stimulated three in the Eagle Ford; it also plans to
have two rigs running. As Carrizo increases exposure to oil, valuations should continue to go higher.

Clayton Williams Energy (NASDAQ:CWEI) currently has 166,400 acres in the Eagle Ford. This location is mostly oil and Clayton has 100% working interest. There are three wells drilled and producing, with a fourth well drilled in the last quarter of 2010. Clayton is 62% oil.

All said, the Giddings area has 200,000 acres and the Permian has 188,000 acres. Clayton Williams has a nice portfolio of locations in Texas, New Mexico, and Louisiana. This company has also had a very nice run with the price of oil increasing. Year-end proved reserves are 20 million Boe in the Permian, with year-end proved reserves of 8.7 million Boe. Clayton has had a nice run and is up 128.8% for the year. It is very possible this company could continue its run.

Goodrich Petroleum (GDP) considers the Eagle Ford to beone of its major holdings. This company got into this area in 2010, and drilled eight gross wells. This work has expanded to a second rig, and this year Goodrich plans to spend $145 million on 20-24 wells. Goodrich's largest position in the Haynesville shale is over 88,000 net acres. It also has 49,000 net acres in the Taylor sand.

Goodrich is another natural gas company using its techniques to gather liquids. I would be a little wary of this company, as it has underperformed other companies in this sector. With the oil market beginning to pull back, this would not be the name to take a chance on.

GeoResources (NASDAQ:GEOI) seems to be the perfect combination. It is a company that has decent size acreages in the Eagle Ford and the Bakken. This is another of may favorite companies, I wrote an article on this company here, and GeoResources was also covered in a general Bakken analysis of smaller stocks with Bakken exposure here.

GeoResources has 21,000 net acres in the Eagle Ford, with the opportunity to add to its lease position. The changes in GeoResources point to this company converting to liquids quickly. This company is about 60% liquids currently. The location within the Eagle Ford is in the oil window.

Clayton Williams is currently in this same area and has completed its three wells mentioned earlier at this location. IPs in this area have been as high as 2,000 bopd (EOG). Magnum Hunter (MHR) had a high of 1,335 boepd in one of its neighboring wells.

GeoResources currently has 46,000 net acres in the Bakken. This is one to watch, as it has an exciting group of holdings and seems to be in a good position, especially if it is able to obtain more acreage. This company is up 86% over the past year.

Abraxas Petroleum (NASDAQ:AXAS) is another company with acreage in the Eagle Ford and Bakken. The Eagle Ford position is 8,333 gross acres as part of the Blue Eage JV, where Abraxas owns a 50% share. Abraxas believes it will have 52 locations here. It expects four net wells will be completed in the Eagle Ford. The areas of interest are in the oil window and gas/condensate window.

Abraxas has several areas of interest. It has 20,835 net acres in the Bakken. The Niobrara position is 18,700 net acres. There are a couple other locations that can be researched here. It has locations at several locations that could have significant upside. This company is up 143% over the past year.

Crimson Exploration (NASDAQ:CXPO) is a very small oil and gas company that has significantly underperformed its peers with a one-year gain of 14.5%. Crimson is in an interesting situation, as it has the opportunity of significant gain from its Eagle Ford oil position. Crimson has 9,300 net acres in the Eagle Ford. Crimson believes it could have up to 90 gross locations. The majority of Eagle Ford is located in the oil window and will have approximately 83% liquids. It also has relatively low price capex for well completion. Overall well cost here will be from $4 to $4.5 million. This accounts for 66 of the drilling locations mentioned earlier.

PetroQuest Energy (NYSE:PQ) recently started a position in the Eagle Ford. This is a small position it is planning to add to, depending on success. PetroQuest is another company in the conversion phase, from gas to oil. The position in the Eagle Ford is currently 3,200 gross or 1,600 net acres. This year it is doing a three-well operated program. PetroQuest has stated it is planning to aggressively add acres all year. 12% of current capex is going to this area. Although I am not bullish this stock as it has lagged the sector, it is up over 6% the last three months.

Here is a brief list of some of the other names also in the oily acreage of the Eagle Ford. It can be used as a study guide of sorts to find names of possible interest with investments in this particular shale.

  • Chesapeake (NYSE:CHK)
  • Newfield Exploration (NYSE:NFX)
  • Anadarko (NYSE:APC)
  • Exxon (NYSE:XOM)
  • El Paso (EP)
  • Cabot Oil and Gas (NYSE:COG)
  • EOG Resources (EOG)
  • Petrohawk (NYSE:HK)

This is a general overview of names that have allocated capital for exposure to the Eagle Ford. When comparing different oil shale plays within the United States, there are advantages to having wells at the different locations. The Eagle Ford has been an area that is less expensive to drill when compared to the Bakken. The Bakken will generate more revenue on average than the Eagle Ford when comparing the life of these wells. The Eagle Ford is less expensive, so these wells will pay for themselves over an earlier timeline. Another major difference is the Bakken has a much higher percentage of oil.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GEOI, AXAS, CWEI, ROSE over the next 72 hours.