4 Lease Holders in the Eagle Ford Shale Should See Huge Profits

|
 |  Includes: APA, CHK, EOG, EVEP
by: David White

The Eagle Ford shale play extends about 400 miles across south Texas in a 50 mile wide band. It is one of the most prolific oil/natural gas/liquids fields in the U.S. Estimates say it holds 5,000 to 15,000 barrels of oil equivalents per acre. It stands to reason that the big leaseholders in the Eagle Ford shale play will profit hugely. The Eagle Ford development is heating up now. In 2009 only 94 permits were granted in the Eagle Ford. In 2010 1,018 drilling permits were granted. This year is expected to show even more growth in the number of permits granted.

Four of the biggest leaseholders in the Eagle Ford shale play are Chesapeake Energy Corp. (NYSE:CHK) with 625,000 net acres, EOG Resources Inc. (NYSE:EOG) with 520,000 net acres, Apache Corp. (NYSE:APA) with 450,000 net acres, and EV Energy Partners LP (NASDAQ:EVEP) with 450,000 net acres. If we take the ballpark figure of 10,000 recoverable boe per acre as the median of the above estimate, these four companies have leaseholds on an approximate average of 500,000 acres * 10,000 boe/acre = 5 billion boe apiece. This is highly likely to make these companies more profitable in the near future. Even if you use the low estimate of 5,000 boe per acre, they would still average about 2.5B boe each in their Eagle Ford shale lease holdings. The companies could find they get closer to 7.5B boe each out of the leases.

It will still be several years before these companies are producing oil at near peak volumes, so let’s look at their near term financial conditions. The table below contains data from TDameritrade and Yahoo Finance for each of the companies above.

Stock

CHK

EOG

APA

EVEP

Price

$28.79

$102.19

$119.10

$50.96

1 yr. Analysts Target Price

$38.62

$122.54

$146.70

$56.80

PE

24.27

146.61

12.85

101.51

FPE

9.11

16.56

8.93

16.71

Avg. Analysts’ Opinion

2.4

2.5

1.8

2.0

Price/Book

1.54

2.33

1.87

1.91

Price/Cash Flow

7.65

12.17

6.62

22.04

EPS Growth Estimate for This Year

-0.70%

308.70%

35.50%

23.40%

EPS Growth Estimate for Next Year

7.80%

64.10%

10.30%

23.00%

5 yr. EPS Growth Estimate per annum

11.00%

11.50%

8.78%

5.00%

Market Cap

$18.27B

$27.43B

$45.67B

$1.74B

Enterprise Value

$28.38B

$31.05B

$52.69B

$2.12B

Beta

1.31

0.96

1.16

1.08

Short Interest as a % of Float

2.99%

2.69%

1.38%

0.47%

Cash per Share (mrq)

$1.34

$6.22

$0.93

$0.86

Total Debt/Total Capital (mrq)

39.80%

30.71%

24.46%

35.60%

Quick Ratio (mrq)

--

1.25

0.86%

--

Interest Coverage (mrq)

--

5.41%

43.82%

0.24

Return on Equity (ttm)

6.13%

1.61%

16.75%

1.94%

EPS Growth (mrq)

-128.35%

11.35%

37.41%

-168.26%

EPS Growth (ttm)

-8.05%

-65.57%

44.58%

200.75%

Revenue Growth (mrq)

-42.39%

38.40%

46.82%

51.89%

Revenue Growth (ttm)

-3.82%

32.54%

38.21%

44.79%

Annual Dividend Rate

$0.35

$0.64

$0.60

$3.04

Gross Profit Margin (ttm)

83.94%

87.06%

81.83%

62.45%

Operating Profit Margin (ttm)

14.23%

8.69%

44.41%

35.06%

Net Profit Margin (ttm)

10.68%

2.67%

25.94%

13.48%

Net Shares Purchased by Institutions in the last 6 months

(-72,357,300) or (-19.52%)

(-9,667,800) or (-4.02%)

1,667,510 or +0.5%

(-241.224) or (-4.8%)

Click to enlarge

The recent Institutional selling of CHK stock makes me wonder if institutions are likely to get back in soon. If they are not, it may be best to delay buying this stock for a while. Its recent EPS and revenue growth numbers also look awful. Much of this is likely due to the natural gas area of the company (and to development expenses). The Eagle Ford shale should substantially expand CHK’s oil production. It should be very lucrative. Still it might be best to wait until you saw some improvement in the EPS and revenue growth numbers before entering this trade. Likely the institutional buyers would be coming back in then too. Watch the Q2 results.

All of the above stocks are likely to be successful due to their leaseholds. However, some of them are bigger than others. The bigger market cap stocks will get less of an Eagle Ford benefit. EVEP may not have all of the best numbers, but it is small enough to benefit hugely. It also has a large dividend ($3.04). You could buy EVEP for the dividend. Then you could wait for the great performance. Be aware that it might take several years. Still a $3.04 annual dividend for a $50.96 priced stock is a 5.97% return without any stock appreciation. In these tough times that shouldn’t be sneezed at.

The one-year charts might give us a better technical idea of which stocks should do well. The charts are below.

Click to enlarge charts

The one-year chart of CHK:

Click to enlarge

The one-year chart of EOG:

Click to enlarge

The one-year chart of APA:

Click to enlarge

The one-year chart of EVEP:

Click to enlarge

Technically the charts show that all of these stocks are oversold. Each could bounce upward from its current position. However, it is unclear how long such an upward bounce would last in a troubled market. CHK is turning partially to oil to boost its revenues and EPS earnings. This should work longer term. EOG has big lease holdings in both the Eagle Ford shale and the Bakken. Logic says it should do well given time. APA has been a highly loved stock for some time. It should continue to perform well. APA has new discoveries in Egypt to go along with its hot Eagle Ford play. However, it has nearly twice the market cap of the next smallest company. The Eagle Ford will be less important to APA than to the other three leaseholders mentioned. Still it should do well longer term.

EVEP has the best looking chart. It looks to be in a still strong uptrend. EVEP may be the only one you really want to start averaging into soon. It has a small market cap. Its comparatively large lease holdings in the Eagle Ford should do wonders for its long term profitability. Its dividend of $3.04 (approximately 6%) will pay you to wait for the development in the Eagle Ford. The dividend should also buoy the stock. Few investors will want to short a stock with that big a dividend. Longer term I also like CHK and EOG as good Eagle Ford plays. They have the highest five-year growth rate per annum.

Investors should watch these two stocks for signs of improvements in their numbers. You will want to get in before the crowd. Perhaps by the end of the summer the fundamental financial numbers will have improved. Their development plan fundamentals are already good.

In a market as troubled as this one is, legging in is a good strategy for almost any long term buy you do. EVEP is oversold on the Slow Stochastic subchart. However, it could still go lower. Now is a good time to start legging in. Only time will tell if it is the best time for a big one time buy. The overall market and the oil sector general direction will also have a large effect on the direction of the stock price. The relatively low Beta is encouraging though.

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