Buda Oil Discovery In South Texas Sparks Oil Patch Interest

by: HiddenValueInvestor

The Buda is an oil and gas bearing formation beneath the Eagle Ford in South Texas. It requires natural fractures to be produced and natural fractures do not exist everywhere. But a sweet spot was discovered in Northern Dimmit and Southern Zavala Counties. Three different oil companies have drilled successful Buda wells in the sweet spot. The wells are so prolific they are outperforming Eagle Ford wells. The three companies with successful wells are privately owned Dan Hughes Oil Company, Sage Energy, and publicly traded Crimson Exploration (NASDAQ:CXPO).

To highlight how successful these wells have been Sanchez Energy (NYSE:SN) has estimated that with oil at $100 its best Eagle Ford wells reach all-in-finding-cost payback after .8 years for an internal rate of return of 117%. Its weakest Eagle Ford wells reach payback in 2.8 years for a 27% internal rate of return. The Beeler 2H Buda well spudded by Crimson Exploration in April produced 693 Boepd in its first 83 days of production and will reach payback in less than four months. Buda wells cost less than $4 million because they do not require expensive fracture stimulation jobs, which is one of the reasons they reach payback so much quicker. The most prolific Buda well drilled so far is the Dan Hughes Oil Company Heitz 302 3H well, which sits right next to the Crimson property line and produced 289,000 BOE in its first 12 months. This well reached payback in less than 2 months.

So far Wall Street has yawned at this discovery because the largest potential beneficiary Chesapeake (NYSE:CHK) had their Northern Eagle Ford acreage up for sale and didn't talk about it. The only other publicly traded operator with a successful Buda well has been Crimson. However, their stock has been going sideways because they are being bought out in a merger with Contango (NYSEMKT:MCF). They have not made a presentation at an investor conference since they successfully drilled the Beeler 2H Buda well.

But while Wall Street is asleep, the oil exploration industry is not. EXCO Resources (NYSE:XCO), which purchased Chesapeake's Northern Eagle Ford package in Zavala, Dimmit, Frio, and LaSalle Counties has stated its intention to seek upside by drilling Buda wells, as well as Austin Chalk wells in its acquisitions presentation. Sanchez Energy has stated plans to drill a test Buda well and Pearsall Shale well in 2014 in its second quarter conference call. Finally, Matador Resources (NYSE:MTDR) in its second quarter conference call mentioned it is shooting 3D seismic on its Zavala acreage for the purpose of potentially drilling Buda and Austin Chalk wells. Matador specifically mentioned the success of the three oil companies with producing Buda wells only a few miles from Matador's acreage as the main reason for running 3D seismic. Anadarko Petroleum (NYSE:APC) and Goodrich Petroleum (NYSEMKT:GDP) also have acreage close by that could be prospective for the Buda.

The Buda wells drilled so far have been so profitable that they can move the needle significantly for all of these companies. Investors need to be cautioned it is not yet clear how large the Buda sweet spot is. The heart of the sweet spot might be the Dan Hughes Heitz 302 3H well on the Crimson lease line. Or, it might be somewhere else. The only way to find out is to drill more Buda wells. The next Crimson well will be completed in September and more information may become available at that time. There was a time not so long ago when Wall Street was asleep on the potential of the Bakken, the Eagle Ford, and the Marcellus.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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