Marathon May Have Increased the Value of Eagle Ford Leaseholders, Part 3

by: Michael Filloon

Marathon's (NYSE:MRO) purchase of Hilcorp's Eagle Ford acreage for approximately $25000/acre left some scratching their heads. Marathon believes this is a good purchase. What does Marathon know that prompted the acquisition at this high dollar amount?

Marathon has had other dealings in this area prior to the Hilcorp purchase. Lucas Energy (NYSEMKT:LEI) signed a JV with Marathon in March. This is interesting as it was completed before the June deal was inked to purchase Hilcorp's acreage. Hilcorp also has a JV signed with Lucas. There is good reason to like Lucas' acreage in Gonzales and Wilson counties. At three separate depths, different resource levels can be found. The Austin Chalk, Eagle Ford and Buda formations all contain resource and can be drilled to obtain resource. Since Lucas' acres are in a stacked play, it is able to deal deeper rights (Buda and Eagle Ford formations) while maintaining the shallow (Austin Chalk formation). Hilcorp acquired rights to the Eagle Ford in Gonzales County only. Lucas retained a 15% working interest in the Eagle Ford, and 100% of the Austin Chalk. Lucas received cash and was carried on the first two wells. Hilcorp paid $15 million to drill and frac the first two wells.

Marathon's deal with Lucas was for the Eagle Ford and Buda formations in Wilson County. Marathon acquired a 50% interest in 1000 acres below the base of the Austin Chalk. Marathon is the operator and Lucas retains full rights to the Austin Chalk.

The majority of Marathon's acreage in the Eagle Ford is located in:

  • Wilson County

  • Atascosa County

  • Frio County

The acreage Marathon will acquire from Hilcorp is located in:

  • Atascosa County

  • Karnes County

  • Gonzales County

  • Dewitt County

  • Lavaca County

It seems that Marathon has been specific as to where it believes the best Eagle Ford acreages are. If it is correct, this bodes well for Lucas.

Rosetta Resources (NASDAQ:ROSE) has 65000 net acres in the Eagle Ford with 50000 net acres in the liquids-rich area. It has an inventory of 450 potential locations. Its Gates Ranch acreage has an estimated 12.6 Tcfe of hydrocarbons in place. Rosetta estimates it will have 58 total completed wells by the end of this year. In five quarters, it has gone from startup to 120 Mmcfepd. Cost savings are being realized, as three well pad drilling decreases costs by $500,000/well. Its Gates Ranch location is 26500 net acres in the condensate window, leaving an additional liquids rich acreage of 23500. The non-Gates Ranch acres will be tested this year and is located in Dimmit, Gonzales, LaSalle and Webb Counties.

Rosetta has divided its Gates Ranch acreage into two parts.

  • Gates North-5.0 Mmcfpd and 450 Bopd (6.7 Bcfe EUR)

  • Gates South-7.0 Mmcfpd and 350 Bopd (8.1 Bcfe EUR)

Gates Ranch has well costs of $8.25 million on 100 acre spacing. Rosetta is an interesting play as it is spending almost all of 2011 cap ex on the Eagle Ford. I am watching Rosetta closely, but it is currently not one of my favorites. For more information on Rosetta's business go here.

Murphy Oil (NYSE:MUR) has 220000 acres in the Eagle Ford. To date, Murphy has drilled 25 wells. Fifteen are currently in production with 10 waiting to be fracced. It has current gross production of 4000 Bopd and 5 Mmcfpd. Murphy has four rigs in the Eagle Ford and plans to increase this number to eight by year end. It is focusing on Karnes County with two of the four rigs at this location. Murphy states Karnes has an EUR of 580 MBoe/well, and has an estimated value of $12000-$15000/acre. It has one rig in Tilden (Atascosa and McMullen Counties) and Catarina (Dimmit County). Tilden EUR is 580 Mboe/well and has an estimated value of $9000-$12000/acre. Catarina has an EUR of 350/well and estimated value of $10000-$16000/acre. These valuations per acre represent purchases in the Eagle Ford, and to my knowledge do not reflect Marathon's purchase of Hilcorp. Murphy's dedicated frac crew is completing three to five wells per month. Murphy has a significant position in the Eagle Ford, but is not significantly levered. Murphy is a good company with very good prospects going forward, even if the economy slows in the second and third quarter.

Penn Virginia (PVA) has 12700 net acres in Gonzales County of the Eagle Ford. These acres are in the oil window. Expectations are for 90 to 115 drilling locations. Three rigs are drilling a possible 29 gross/24.3 net wells this year. Some 52% of its 2011 cap ex will be spent on the Eagle Ford. Penn Virginia's EUR of 280 to 380 Mboe/well are low compared to other estimates. In the Gonzales County volatile oil window, Penn Virginia has had some impressive well results.

  • Gardner 1H-IP of 1250 Boepd

  • Southern Hunter 1H-IP of 1335 Boepd

  • Gonzo North 1H-IP of 1039 Boepd

  • Furrh 1H-IP of 900+ Boepd

Competitors have also had good results:

  • (MHR) Gonzo Hunter 1H-IP of 605 Boepd

  • ((NYSE:EOG)) Brothers Unit-IP of 1798 to 2508 Boepd

  • (EOG) Marshall Unit-IP of 703 to 1658 Boepd

  • (EOG) Cusack Clampit-IP of 1044 to 2107 Boepd

  • (EOG) Milton Unit-IP of 668 to 914 Boepd

  • (EOG) Harper Unit-IP of 695 to 1070 Boepd

  • (EOG) Dulling-IP of 1255 to 1353 Boepd

Penn Virginia has a small acreage in the Eagle Ford, but it is near some of the better-producing wells in the area. If it can get results close to that of EOG, a significant appreciation of stock price would be seen. Penn Virginia's EURs are far below that of most of the companies in the volatile oil window, which leads me to believe these numbers will be guided upward in the future.

El Paso (EP) has 170000 net acres in the Eagle Ford. One hundred and five thousand of those acres are in the oil window. Thirty one thousand net acres are in the north (oil window) and 74000 in the central acreage (volatile oil window). It has estimated drilling locations of 1145. El Paso's Eagle Ford acreage is located in LaSalle and Dimmit counties. Its central holdings are outperforming the northern acreage. The differences are quite large. El Paso expects wells to be drilled on 120 acre spacing in the north and central Eagle Ford, and 160 acre spacing in the south (dry gas). El Paso has diversified holdings that allow the differentiation in production through the different Eagle Ford windows.

Northern Acreage ($80/Bbl and $4/MMbtu)

  • $5 to $7.5 million in capital costs

  • Gross EUR of 400 to 550 Mboe

  • IP of 400 to 800 Boed

  • 30-day IP of 300 to 600 Boed

  • IRR of 25% to 45%

Central Acreage

  • $7 to $9 million in capital costs

  • Gross EUR of 400 to 900 Mboe

  • IP of 600 to 1100 Boed

  • 30 day IP of 400 to 900 Boed

  • IRR of 25% to 50%

Southern Acreage

  • $7 to $12 million in capital costs

  • Gross EUR of 4.0 to 8.0 Bcfe

  • IP of 5 to 15 MMcfe/d

  • 30 day IP of 4 to 12 MMcfe/d

  • IRR of 0% to 15%

The difference in production of the two windows in question are quite large. Companies with acreage in the volatile oil window are better positioned than those in other areas. El Paso is currently planning to split the company into two businesses. This is an interesting situation, much like that of Marathon's planned split.

Petrohawk (NYSE:HK) has 332300 risked net acres. It will have 14 rigs running by the end of this year. In Black Hawk (58300 net acres), Petrohawk has:

  • An average initial condensate yield of 385 Bc/Mmcf

  • An average EUR of 1.8 Bcf + 550 Mbc + 220 Mbngl

  • An estimated well cost of $8 to $8.5 million

  • 9 rigs operating

Petrohawk has 35 wells drilled to date in the Black Hawk.

  • Its average IP of 2.8 Mmcfe/d +1400 Bc/d + 275 Bngl/d

  • Its average 30 day rates of 2.0 Mmcf/d + 980 Bc/d + 250 Bngl/d

  • Its average EUR of 1.8 Bcf, 550 Mbc, 220 Mbngl

Hawkville Field has 224000 net acres. It has 50% gas with 37 Bngl/Mmcf and 50% gas condensate with 100 Bc/Mmcf initial yield and 83 Bngl/Mmcf. The average gas with NGL EUR is 5.0 Bcf + 207 Mbngl. The average gas condensate EUR is 2.5 Bcf + 195 Mbc + 249 Mbngl. It has an estimated well cost of $7.5 million. Five rigs are operating. Petrohawk has completed several wells using the HiWAY frac design. It shows a significant improvement over hybrid technologies. Nine Petrohawk wells in Hawkville used hybrid fraccing technologies, which produced a:

  • 90-day rate of 5366 mcfe/d

  • Pressure of 3207

When HiWay was used, it produced a:

  • 90-day rate of 7107 mcfe/d (increase of 32%)

  • Pressure of 4541(increase of 42%)

Petrohawk believes this technology will continue to increase IP rates and EURs. Petrohawk's large Eagle Ford and Permian acreages are interesting, but it does not have the value of other names in the space. It seems expensive in comparison, but after the pullback, most names are cheap.

In summary, these companies continue to expect a wide range of EURs. Differences have to do with several variables I have covered in Part 1 and Part 2 of this series. In the companies highlighted, the volatile oil window is producing the best overall IPs, which translates to higher EURs. I am sure that these numbers will continue to get better through improvements in technology and techniques. The price of oil and LNG will edge higher, as we continue to use more and close the gap in supply and demand. Due to this, the oil space will continue to be a staple in most investor portfolios.

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

Additional disclosure: This is a list of companies operating in the Eagle Ford and is not a recommendation to buy. Investments, especially in commodities, can significantly depreciate in a very short period of time. Because of this, every investor should study to familiarize himself/herself with an investment before making it. Source: Marathon (MRO) Source: Lucas (LEI) Source: Rosetta (ROSE) Source: Penn Virginia (PVA) Source: Murphy Oil (MUR) Source: El Paso (EP) Source: Petrohawk (HK)

Continue to Part 4 >>