Profit In The Eagle Ford Shale - 5 Smaller Companies To Consider

by: Bruce Vanderveen

Awe-inspiring growth. So it has gone in the Eagle Ford Shale lately. Relatively unknown until a few years ago, a recently published Reuters' article now describes the play as "hotter than the Bakken."

Reasons for the rapid growth are many: Located in South Texas, the Eagle Ford is closer to infrastructure such as pipelines, refineries, storage, and ports than North Dakota's Bakken. With shallower wells and easier-to-frack strata, drilling costs are substantially less. Initial production rates are higher too. Indeed, the Eagle Ford is a drillers' paradise.

It's true that current estimates show the Bakken has substantially more ultimately recoverable oil than the Eagle Ford. However, with oil prices fluctuating around $90, Bakken's profitability falls off compared to the less costly Eagle Ford wells.

In an earlier article, I profiled the largest Eagle Ford landowners. Here, I will focus on five smaller, high potential, producers in the play. While all of the five companies below have a big stake in the Eagle Ford, most also have significant assets elsewhere. Many companies are drilling the play and I realize the list below is incomplete. If readers feel I have omitted a company that should be included, please comment accordingly.

(Note: Revenue growth, debt to equity ratios, and other statistics below are sourced from Yahoo Finance)

Plains Exploration & Production (NYSE:PXP) - Market Cap: $5.3 Billion

Plains Exploration, the largest company profiled here, has, in addition to the Eagle Ford, a presence in California, the Gulf Coast, and the Rocky Mountains. Plains has 58,000 net acres in the oil and wet gas windows of the play. Investopedia notes that Plains has set (and so far mostly met) company goals of growing total company revenue and production at double-digit rates through 2015 while growing Eagle Ford production at a compound annual rate of 52%.

Plains' financials show that as of the second quarter of 2012, quarterly revenue growth is over 10% year-over-year, total debt is $3.92 billion, and debt/equity is 104. The company has a strong $6.70 cash per share and good operating cash flow.

Plains, in addition to its oil and gas operations, has derivative assets and an investment in McMoRan Exploration (NYSE:MMR) common stock, both which can significantly affect quarterly income.

Carrizo Oil & Gas (NASDAQ:CRZO) - Market Cap: $980 Million

Carrizo was an early mover into the Eagle Ford and according to its website has 41,000 net acres and 50 wells (primarily in the oil and condensate windows). The company started remaking itself from a mostly natural gas producer to liquids producer in 2010 and now claims liquids account for over 60% of revenue. The company has met and exceeded its Eagle Ford goals; profits have nearly quadrupled thanks to the company's higher oil production.

Carrizo's financials show that, as of the second quarter of 2012, quarterly revenue growth is at 83% year-over-year, total debt is $870 million, and debt/equity is 166.

In addition to the Eagle Ford, the company has valuable assets in the Niobrara and Utica shale, natural gas in the Marcellus and Barnett shale, and North Sea oil.

Matador Resources (NYSE:MTDR) - Market Cap: $572 Million

This relatively unknown company (February 2012 IPO) is now ramping up operations in the Eagle Ford. According to Investopedia, Matador has 29,000 net acres spread across several counties. The company estimates that 85% of its leasehold is in the oil and liquids windows. The majority of 2012 capital expenditures will be in the play. Matador saw large oil production increases in 2011 along with a big increase in proved oil reserves.

Matador's financials show that, as of the second quarter of 2012, quarterly revenue growth is at 113% year-over-year, total debt is only $15 million, and debt/equity is 3.6.

The company seems to have a good earnings trend to go with its strong balance sheet. In addition to the Eagle Ford, Matador has a strong presence the Haynesville Shale and Cotton Valley in northwest Louisiana and East Texas.

Magnum Hunter Resources (MHR) - Market Cap: $520 Million

Revenues have exploded upward (almost 300%) for Magnum Hunter recently. A strong contributor to the increase is production from its 24,000 net acres in the Eagle Ford, which are 100% in the oil window. Like the other companies in this article, Magnum Hunter is in the process of transitioning from a gas to liquids producer.

Down almost 50% from its 52-week highs, the company is admittedly speculative. Seeking Alpha contributor Bret Jensen details why he thinks Magnum Hunter is a good buy at this time.

Magnum Hunter's financials show that, as of the second quarter of 2012, quarterly revenue growth is 293% year-over-year, total debt is $369 million, and debt/equity is 54.

This company exhibits great potential as it has a presence in several unconventional plays across the U.S. (Bakken, Marcellus, and Utica).

Penn Virginia (PVA) - Market Cap: $345 Million

Penn Virginia, a company which dates back to 1882, has paid dearly over the last five years for its dependence on natural gas (82% of reserves); shares are down 90% from 2008 highs. In the last couple of years, the company has shifted its focus toward liquids in the Eagle Ford.

The company's website claims 25,100 net acres in the Eagle Ford oil window with 250 well locations - 51 producing. Penn Virginia's second quarter news release noted that oil and liquids now account for 45% of production, $100 million sale of Appalachian assets, and the discontinuance of the dividend. Insiders have been buying recently and optimism for a turnaround have driven shares up nearly 80% from the lows of last April.

Penn Virginia's financials show that, as of the second quarter of 2012, quarterly revenue growth is 4.2% year-over-year, total debt is $779 million, and total debt/equity is 94.

In addition to its Eagle Ford assets, Penn Virginia has large legacy natural gas holdings in the Marcellus and Haynesville Shale, and Cotton Valley Sands of East Texas. Now, if only the price of natural gas can continue its recent upswing, things might look very good for Penn Virginia.

Macroeconomic Considerations

Oil is a strong indicator of global health and prices can be very volatile. WTI is currently around $92/barrel, up almost 20% over the last six weeks. This is due to current Mid-East jitters over Iran and Syria and recent pronouncements from the European Central Bank that they will do whatever is necessary (print?) to preserve the Euro. Countering this, the world seems to again be going into a global slowdown.

High debt companies such as Carrizo, Magnum Hunter, and Penn Virginia will rebound the most when oil turns higher. These companies are speculative and highly volatile. Consider picking up shares after price plunges - which has been fairly often recently.

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

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

Additional disclosure: I like MHR and CRZO but waiting for oil price to fall before investing.

Disclaimer: This article is informative only - not buy or sell advice. Do your own research and due diligence before investing.

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