Seeking Alpha
Long only, deep value, growth at reasonable price, dividend
Profile| Send Message|
( followers)  

Monday, the U.S. Government released its first official forecast on "tight oil" (see Reuters article here). Surprisingly, the report shows the Eagle Ford in Texas will likely out produce the Bakken within a few months. According to the release Eagle Ford oil production was 520,000 bpd in April 2012 while the Bakken's was 542,000 bpd.

Surprised? I was. But, consider: Marathon CEO Clarence Cazalot and others think the Eagle Ford is one of the best unconventional resource plays in the world. The surge in Eagle Ford Oil is especially astounding when one sees that prior to 2010 Eagle Ford production was practically nonexistent (see chart).

The release goes on to say that tight oil production from the Bakken, Eagle Ford, Permian Basin, and others now account for 12.5% of U.S. production, production which is - after decades of decline in the U.S. - now steadily rising.

Covering over 20,000 square miles the Eagle Ford boasts some 3 billion estimated recoverable barrels of liquids (oil, natural gas liquids, and condensate). Lying 4000 to 14,000 feet below the surface the formation arches across south Texas from the Mexican border to just north of Houston.

The formation has 3 sections or "windows." To the north is the oil window, directly south of that is the "wet gas" window - high in natural gas liquids and condensates, and further south, the dry gas window.

Why the Eagle Ford surge? It simply is more profitable than the Bakken - especially with oil below $80 a barrel. The oil costs considerably less to extract. In the Eagle Ford drilling depths are less, the oil is closer to pipelines and refineries, and the brittle carbonates and sandstones fracture easier than Bakken shale. According to EOG, Eagle Ford wells come in around $5.5 million while Bakken wells average over $8 million. New wells can take as little as 2-3 weeks to drill in the Eagle Ford.

Here are the 5 companies holding the largest land positions in the Eagle Ford: EOG Resources (NYSE:EOG) with 572,000 net acres is clearly in first place while Chesapeake Energy (NYSE:CHK) with more than 400,000 net acres is second. After that it gets a little murky but look at Newfield Exploration (NYSE:NFX) with 335,000 net acres, Marathon Oil (NYSE:MRO) with 300,000 acres, and ConocoPhillips (NYSE:COP) with 223,000 net acres) to round out the top five.

Realize that not all acreage is the same. An acre of dry gas is worth considerably less than one over wet gas and "sweet spots" exist making some land holdings much more valuable than others. Thickness and depth of oil or gas bearing strata varies considerably. A myriad of other factors may also be involved. Do due diligence before investing.

EOG Resources Market Cap $23 Billion

EOG is the largest landholder in the Eagle Ford, its land is mostly in the oil "window." The company is in numerous shale basins across the U.S. and Canada and is also the largest Bakken oil producer. The company has a great balance sheet and good operating cash flow. EOG's liquid production is providing cash now while its huge natural gas resources are held in reserve for the future price appreciation.

Chesapeake Energy Market Cap: $11.5 Billion

Embroiled in controversy and loaded with debt, Chesapeake seems very speculative. Say what you may, one thing, is certain about Chesapeake: The company has excellent assets. Second only to EOG, Chesapeake's 400,000 Eagle Ford acres are primarily in the wet gas condensate window.

Chesapeake is taking remedial actions to solve its problems. The company is selling assets to increase liquidity, CEO Aubrey McClendon has been somewhat reined in, and several members of the board have been replaced. Hopefully, the worst will soon be over for this asset rich company.

Newfield Exploration Market Cap $3.5 Billion

Newfield's major holdings are in North America, it is in both the Eagle Ford and Bakken. It's also offshore Malaysia and China. Yahoo finance shows a trailing P/E of 5.1 and forward P/E of 7.5. Shares are down over 65% in the last year so now may be a great time to consider investing.

Marathon Oil - Market Cap: $17.5

As with most oils, Marathon's shares are down sharply since April. Trailing P/E is 7.1, forward P/E is 6.2 and the company has strong cash flow according to Yahoo Finance. Marathon has a strong focus on the Eagle Ford. After buying Hillcorp in June 2011 the company now has over 300,000 net acres in the play and expects production to grow from 9,000 bopd in Q4 2011 to 100,000 bopd in 2016 - a 10 fold increase (See this flyer, page 20).

ConocoPhilips - Market Cap: $67 Billion

This large international has staked a strong presence in the Eagle Ford. The company, having recently spun off its refining, pipeline and chemical assets is "ramping up in the Eagle Ford." Trailing P/E is 5.8, forward P/E is 7.9. Good cash flow.

Macroeconomic Cautions

Oil and gas prices are down big time since last April as the world teeters on the brink of recession. Europe is on the ropes, Chinese growth is decelerating. In the U.S. job growth is now also falling.

Remember, during the 2009 economic crisis oil fell to below $40 a barrel. Central Bank printing may keep it from going that low this time. Be careful!

Disclosure: I am long NFX, CHK.

Additional disclosure: Considering MRO.

Source: Surging Eagle Ford Oil To Outproduce Bakken - 5 Top Companies To Consider