This article is an analysis of the Austin Chalk. In an effort to provide some clarity with respect to unconventional oil plays, I am trying to show where these specific shales are and why they are better or worse, and which companies have an advantage or leverage with respect to the area.
This play is located in three states. It crosses Texas, Louisiana, and Mississippi. The companies working the Austin Chalk play are doing quite well, and finding other zones such as the Eagle Ford. The Austin Chalk was initially drilled vertically, but new techniques used in horizontal drilling have opened up new venues to profit from. By using multiple fracture stages, oil volumes have increased substantially. The Austin Chalk lies directly above the Eagle Ford. There are several companies drilling this area:
- EV Energy Partners (NASDAQ:EVEP)
- Swift Energy (NYSE:SFY)
- Evolution Petroleum (NYSEMKT:EPM)
- Anadarko Petroleum (NYSE:APC)
- GeoResources (NASDAQ:GEOI)
EV Energy Partners (EVEP) is a master limited partnership (MLP). It currently sells for a PE of 10.78. Current yield is over 7%.
With many oil names coming down on the destruction in Japan, this name could come down. However, being that this is an MLP, this could be a much safer place to put your money. Since this company's IPO, it has had a 150% return and a CAGR of 28%.
They operate over 18000 wells in 12 states. It has 2.7 Tcfe in 2P reserves, and 390 MMCFE/d and 3.5 MM acres under lease. Since this company's IPO, they have created a diversified set of assets.
EV Energy Partners got in early as it made its initially purchase in the Austin Chalk in June of 2007. At this point, EVEP had 13.33% proportional interest. After this initial acquisition, it made 3 more purchases of Austin Chalk acreage. Proportional interest increased to 15.15%. This was a $19 million purchase price.
Net production is 16 mmcfe with access to 1700 locations. Currently 4 active drilling rigs in this area, This has changed to a multi stage frac program, leading to an increased production per well. EVEP has a large, dominant position within this resource area. Total gross well count is 1679. Its gross production is 155 Mmcfed and net production of 120 Mmcfed.
This company has a very large position here at 1 mm gross acres. For those interested in MLPs this seems to be a very interesting investment. EVEP has grown significantly in a short period of time. Although I believe there will be a mild to moderate correction, this may not be a bad investment. With a forward PE of 14.88, this particular stock seems very cheap when growth is considered. 2011 earnings growth is estimated at 21.9% and 2012 18.8% on 6 analysts estimates.
Swift Energy (SFY) is an oil and gas exploration and production company with a core of operations located in the Gulf of Mexico. Its holdings are in Louisiana and Texas. The current PE is 33.5 with a forward PE of 21.7. Analyst estimates are for 2011 earnings growth of -12.6% and 75% next year.
This company has four base core properties. It is 60% liquids production. Its Eagle Ford position is 78000 undeveloped net acres. As seen in some of the seismic companies I have covered, this is a must for oil and gas companies as seismic is needed for directional drilling to have good results. Swift has over 4000 square miles of seismic data. Swift sells itself as a company with low risk/high reward properties. This is correct as they have Eagle Ford/Austin Chalk acreage, which is notorious for high success and flow rates.
Swift currently has a high level of technology, and is an accomplished horizontal driller. Swift also has a large inventory or projects in a resource area it is familiar with. Swift's south Texas locations in 2009 production of 2.7 MMBoe and 43.5 MMBoe proved reserves.
The Austin Chalk is also located within Swift's East Texas area. 2009 production in this area combined with Wilcox. South Texas is seen as multiple horizontal drilling locations. The south Texas area was entered in 1989. Not only did they lease the area cheap, they have found an increase in production shifting from vertical drilling used initially, which has now changed to horizontal drilling.
Eagle Ford locations equal 985 in the south Texas property. There are additional vertical areas. Location spacing varies from 160 acre to 80 acre. The Eagle Ford has been a very active area. As many big players are present. 602 wells have either been permitted, drilled or completed as of September of 2009. In the Eagle Ford wells. 250-375 MBoe resource potential per liquids rich well. Estimates have these wells cost at $6 to $7 million. With respect to straight Austin Chalk holdings in central Louisiana/East Texas, Swift had a non-operated well drilled and completed in South Bury Ferry field, had IP rates of 840Bbls/d and 10.2 Mmcf/d gross production. This is the second drilled well with respect to this JV. Swift has 50% operating interest in this well. These two wells will have production choked back until proper infrastructure is in place. The second quarter of this year will see another visit for the purpose of drilling more wells.
Evolution Petroleum Corp. (EPM) may be the most interesting story in the Austin Chalk. Its 188 million dollar market cap makes it a smaller player with much more vested in this play. Evolution is not currently making money but has a forward PE of 118.
This company is only covered by one analyst so proceed with caution. The analyst estimates a 66.7% growth in 2011 earnings and 300% in 2012 help to justify the large PE ratio.
Evolution has three plays shaping its immediate future. The first is its Delhi EOR project, the second is a shallow gas play in Oklahoma and the third is its Giddings play in the Austin Chalk.
Evolution states they have a new artificial lift technology awaiting patent that allows not only for horizontal wells to be drilled and completed, but also re-entry into old wells to draw out remaining oil reserves.
Giddings wells are naturally fractured horizontals. This is 27% oil, 32% NGLs, and 41% gas resource in Austin Chalk wells. Evolution states the Austin Chalk has proved resources of 3 MMBoe and 1 MMBoe probable resources.
This company is an interesting speculation play. The first reason is the EOR play. Denbury (NYSE:DNR) has proved that this recovery method can be done with oil margins close to that of horizontal drilling in the Bakken. The second reason is the heavy oil recovery project in south Texas and lastly the Austin Chalk re-drills and horizontal drills.
Evolution says, of the 12 current re-entries, they have an average gross recovery per well of 146 MMBoe. The average cost per re-entry well is $1.5 million. Cost of production is $12.44/barrel of oil. Other wells in Giddings will have average gross recovery of 305 MMBoe per well. Average cost per barrel of oil is $10,97.
When looking at current oil pricing, a very nice margin can be had. Currently three wells have been drilled in the Austin Chalk with an additional two wells in the future. Its new artificial lift technology has been applied to the three Giddings wells to date. Currently, Evolution has seen an increase of oil recovered. Upside to this technology could be quite high, but we will have to see how production pans out over the next few projects. Evolution looks to have several catalysts this year, along with liquids production of 90% of company total.
Anadarko Petroleum (APC) has helped to legitimize the Austin Chalk as a credible liquids play. It currently has a historically high PE ratio of just south of 50. The forward PE comes down to 22. These PE valuations seem to be OK considering analyst estimates for 2011 earnings growth of 31.9% and 2012 of 42.5%. Estimates have the Eagle Ford are at a possibility of a EUR of over 400 MBOE. There are over 2000 possible sites. Approximately 85% of this area is liquids. 300000 net acres are operated by Anadarko. The Austin Chalk is currently on a 4 rig program. This company just spud its 11th well here, of a 25 re-entry program. Anadarko has recently reported very good results.
I have profiled GeoResources (GEOI) on several occasions. The first time here. I also covered GeoResources as a Bakken player here. I then covered it for its Eagle Ford leasehold here. The reason for this is its very good developmental properties. The Bakken (based on EURS) and the Eagle Ford (based on low risk/moderate reward) are my favorite unconventional United States plays.
Another reason is valuation. The current PE of this company is 23.44. It has a forward PE of 11.86. When analyst estimates are added to the equation it begins to show us its value. 9 analysts covering GeoResources have 2011 earnings growth at 37.1% and 2012 at 30.2%.
During the second quarter of last year GeoResources completed Chappel Wood #1-H, and Wilkerson Davis Unit #1-H. Chappel was brought on line in May and had an IP rate of 21 Mmcfed. Shortly thereafter production fell off and GeoResources had to remove a restriction from the well. Since then it is producing 620 BOPD and 1226 Mcfd. GeoResources has drilled 16 wells since and had a 100% success rate.
In summary, Austin Chalk is not as well know as Eagle Ford. Even so, Austin Chalk has moderate rewards for very low risk. The low cost and time to drill and complete make these wells a better play in the short term.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GEOI over the next 72 hours.
Disclaimer: The information on this article is not a buy recommendation but general ideas of is happening with in the market. risk can vary greatly causing quick gains or losses, so make sure to study information on a stock before purchasing.