In part 1 of this series I focused on Marathon's purchase of Hilcorp's Eagle Ford acreage. This is an interesting situation, as a little under $25000/acre has become a topic of many conversations in the oil and gas realm. Another issue to consider is how does this effect other shale plays, and what is a realistic expectation of value in the Bakken, Niobrara, and the Anadarko Woodford.
An average investor will continually run into issues trying to calculate current acreage valuations. There are several reasons for this, but most has to do with conservative modeling of acreage. The second is in the acreage involved. A good example highlighted in the previous article is EOG Resources (EOG) , which shows a large difference in its EUR estimates from the west to east. EOG estimates EURs of 460 MBoe in its eastern Eagle Ford acreage and 430 MBoe in the west. This situation gets more confusing when looking at Abraxas' (AXAS) expected EURs of 1100 MBoe.
It's difficult to properly value leaseholds by county, but several companies have documented expectations. Marathon has broken down its own positions by shale, which could be helpful in valuating a competitor's acreage. It is difficult to locate the best areas, as IP rates vary by well design and proficiency of the company. The four shales covered are:
Bakken Shale (375000 Net Acres)
- 450 Net Locations
- $7 MIllion in Well Costs
- 30 Day IP=350 to 700 Boe/d
- Gross EUR=350 to 500 MBoe/well
- Net Resource Potential of 190 MMBoe
Anadarko Woodford (110000 Net Acres)
- 450 Net Locations
- $7.5 Million in Well Costs
- 30 Day IP=600 to 900 Boe/d
- Gross EUR=750 to 1000 MBoe/well
- Net Resource Potential of 500 MMBoe
DJ Basin of the Niobrara (133000 Net Acres)
- 400 Net Locations
- $4 MIllion in Well Costs
- 30 Day IP=200 to 300 Boe/d
- Gross EUR=250 to 300 MBoe/well
- Net Resource Potential of 90 to 125 MMBoe
Eagle Ford (285000 Net Acres)
- 1850 Net Locations
- $5.5 to $8.1 in Well Costs
- 30 Day IP=325 to 1500 Boe/d
- Gross EUR=300 to 840 MBoe/well
- Net Resource Potential of 600 MMBoe
Look at the difference in the number of acres / well. Since the Eagle Ford can drill approximately 160 acres in one well, it significantly increases the net resource potential of the field. Don't take this as gospel, its estimates have a well every 833 acres in the Bakken and companies like Brigham (BEXP) are drilling 4 wells per 1280 acres and are talking about increasing to five or six wells. The most important variable with respect to unconventional plays is reliable and repeatable data. We also do not know for sure what wells will be producing in 15 years. These numbers are just an educated guess. As technologies increase, along with proficiency in completion and production, this could increase IP rates and EURs significantly in a matter of years.
GeoResources (GEOI) has 23000 net acres in the Eagle Ford. It is continuing to add acres. By the end of this year, it will have 3 operated rigs running. 19600 net acres are located in southwest Fayette County. It has 3300 net acres in Gonzales County. GeoResources has an additional 2100 acres in Atascosa and McMullen counties. Ramshorn Investments Inc. has purchased a 50% stake in GeoResource's Eagle Ford acreage. GeoResources will retain 50% interest and continues as the operator. Ramshorn paid cash up front and will fund six horizontal wells.
Its Fayette County acreage is located in the volatile oil / gas condensate window. Activity in this area has been positive. Magnum Hunter (MHR) has completed 3 wells in Gonzales County with an IP from 600 Boe/d to 1335 Boe/d. Penn Virginia Corp. (PVA) has completed one well with an IP of 1250 Boe/d. EOG Resources has completed several wells in the area with an IP from 700 Boe/d to 2000 Boe/d. These IP rates could prove significant with respect EURs. GeoResources has developed estimates as to the economics of its Fayette acreage. It expects wells that have an IP rate of 500 Boe/d will produce an EUR of 350 MBoe. This EUR provides:
- An IRR of 45% at $80 WTI
- A Payout in 1.8 years
- An IRR of 57% at $90 WTI
Wells that have an IP rate of 1000 Boe/d increase the EUR to 500 MBoe. This EUR provides:
- An IRR of 237% at $80 WTI
- A Payout in 0.9 Years
- An IRR of 337% at $90 WTI
If the numbers are correct, GeoResources could do well with these estimates. GeoResources has been beaten up lately, and I think they are a value. This is a good opportunity to start or add to a position in this name.
Chesapeake (CHK) is an interesting company. It was one of the most successful companies during the natural gas bull market. When this market fell apart, natural gas bears pushed Chesapeake down significantly. Chesapeake saw the pressure on natural gas prices coming. In response, it started loading up on oily acreage providing a large liquids resource base at very low cost (I wrote about this here). This company's importance comes from its 158 operated rigs, and the ability to move to liquids production. It has the money to make this happen. Chesapeake has 450000 net acres in the Eagle Ford, and a partnership with CNOOC (CEO). It estimates drilling density to be every 80 acres. Chesapeake's Eagle Ford position has:
- 2810 Risked Net Undrilled Wells
- 203 Bcfe of Total Proved Reserves
- 9000 Bcfe Risked Unproved Resources
- 18100 Bcfe or 3.0 Bboe Unrisked Unproved Resources
- 25 Mmcfe In Daily Net Production
- 17 Rigs Running
Chesapeake has the #2 position in the Eagle Ford. Its Gates 010-CHK-B 1286 5H had an IP of 2268 boe/d. These four wells provide a better picture how Chesapeake's drilling program is going.
- Gates 010-CHK-B 1286 5H had an IP of 2268 Boe/d.
- PGE Browne 1-H in Webb County had an IP of 4 mmcf and 1200 bbls/d
- Lazy A Cotulla 1H in Dimmit County had an IP of .3 mmcf and 930 bbls/d
- Traylor North 1H in Zavala County had an IP of .3 mmcf and 930 bbls/d
Magnum Hunter has 25074 net acres in the Eagle Ford. These acres are in:
- Gonzales County (18082 Net Acres)
- Fayette and Lee Counties (3764 Net Acres)
- Atascosa County (3200 Net Acres)
Magnum has 9 producing wells in the Eagle Ford, with net daily production at 1198 Boe/d. EOG Resources, Petrohawk (HK) and Hilcorp (In process of being purchased by Marathon) have leaseholds close to Magnum. EOG's recent production rates in Gonzales County have ranged from 900 to 1500 Bo/d. Hilcorp's wells have an estimated resource potential of 400 to 500 MMBoe. Magnum expects its wells in the Eagle Ford will produce EURs of 200000 to 500000 BO/well. It estimates well costs of $7.5 to $8.5 million.
In the Peach Creek Prospect of Gonzales County, Magnum has 50% working interest in 34876 gross acres. An average well here has:
- Costs of $6.5 to $8.8 Million
- EURs of 350 to 520 Mboe
- IPs of 500 to 1300 Boe/d
EOG's Hill Unit #2H, had an IP of 1233 Bo/d and 658 Mcfg/d.
Cabot Oil and Gas (COG) is solely focused on the Eagle Ford in its south region activity. It has over 60000 net acres in the oil window. Cabot will drill 25 net wells in the Eagle Ford this year. It has potential for 400 to 500 locations. It states wells in the Eagle Ford will average IPs of 475 to 1025 Bopde, and EURs of 375 to 600 Mboe. Cabot has reserve potential of 150 to 300 Mmboe. Cabot's Buckhorn activity includes:
- Arminius Energy Trust 1H-IP of 1042 Boe/d (30-day avg. of 814 Boe/d)
- Arminius Energy Trust 2H-IP of 576 Boe/d (30-day avg. of 443 Boe/d)
- Zella Cromwell Ranch 1H-IP of 780 Boe/d (30-day avg. of 444 Boe/d)
- Five other wells in testing to drilling status
Cabot also has 10740 net acres in the Powderhorn. There are several industry leaders here:
- Newfield (NFX)
- Sanchez Oil
Take a close look at this company as they have several very good projects. Its Marcellus acreage is also very attractive.
In summary, the Eagle Ford is an interesting prospect. All of these stocks have been beaten up based on paper losses. Although these stocks could fall further, I think they are a good buy based on liquids production. Watch EURs and how they progress. Look for companies with IP rates over 1000 Boe/d, as they should produce EURs of an estimated 500 Mboe.
Disclosure: I am long BEXP.