Marathon May Have Increased the Value of Eagle Ford Leaseholders, Part 1

by: Michael Filloon

When an oil and gas company purchases large acreage at a premium price per acre, one question is asked. Did it pay too much? It's hard to question a company like Marathon (NYSE:MRO). It is well run and knows this business. On June 1st of 2011, Marathon purchased 141,000 net acres from Hilcorp Resources for $3.5 billion. This would almost double Marathon's Eagle Ford position to 285,000 net acres. In June of last year Kohlberg Kravis Roberts and Company (NYSE:KKR) announced it would invest $400 million to help develop Hilcorp's Eagle Ford acreage. In one year, KKR could walk away with $1.13 billion. As part of the deal, Marathon will have 6 rigs under contract in its new acreage and 2 rigs already drilling its current Eagle Ford acreage. This coupled with five rigs on order will allow for aggressive development. In one year from closing, Marathon states they will have 20 total rigs running in the Eagle Ford.

Marathon will be breaking up its company into two parts. The first will be an oil and gas exploration and production company. The other will contain refining and pipelines. I think both are good buys, as this will unlock hidden value. Because of this separation, I believe Marathon is loading up in the best plays. One thing to remember, companies the size of Marathon will not bother with small land purchases because of time and money involved in lining up deals. Most importantly, Marathon wants a centered location. Since they already had a sizeable leasehold, the KKR and Hilcorp deal was perfect for setting up infrastructure to decrease expenses. It also was well placed, complimenting its current Eagle Ford holdings. When a company has acres in close vicinity, it is much easier and less expensive to build a fluids transportation system. Costs can be significant to haul water in and out. Natural gas needs to be transported, and most importantly oil can sent via pipeline. The last possibility is Marathon has found a section of the Eagle Ford that could create production numbers that are significantly higher than other wells in different locations of the play. Marathon recently signed a JV with Lucas Energy (LEI) who had a JV with Hilcorp before its purchase. I have compiled a list of companies in the Eagle Ford, and have taken this information to get an idea of how each area is doing with respect to EURs.

Abraxas (NASDAQ:AXAS)-DeWitt County (EUR 1100 MBoe)

  • 200 MBbl of Condensate
  • 3500 MMcf Sales Gas
  • 315 MBbl NGL

DeWitt County has very good economics by Eagle Ford standards. Its EUR of 1,100 MBoe and IRR is 84% are both excellent. Abraxas' T Bird 1H is in DeWitt and boasts very good 45 day production numbers:

  • 69000 Boe
  • 13900 Bbl Condensate
  • 201.3 MMcf Sales Gas
  • 21600 Bbl NGL
  • 1500 Boe/d Average of First 45 Days

Enduring recently drilled its Keach GU 1, which had an IP rate of 3633 Boe/d. This is very close to the Abraxas T Bird well. Abraxas has 9586 net acres in the Eagle Ford located in DeWitt, Atascosa and Lavaca Counties.

Talisman Energy (NYSE:TLM) has 78000 net acres in the Eagle Ford. It will provide 750 net well locations. Contingent resource is 550 MMBoe (50% liquids). Talisman states its Eagle Ford will have average EUR of 660 MBoe. Its 30 day IP rate per well is assumed at 1200 Boe/d. Talisman's DeWitt County Halepeska Gas Unit 1 had an IP rate of 2665 Boe/d.

Pioneer Natural Resources (NYSE:PXD) has 300000 acres in the Eagle Ford. 80% of this is in the condensate window. 45% of this acreage is in the lean condensate window:

  • 50% Gas
  • 30% NGLs
  • 20% Condensate

35% of Pioneer's acreage is in the rich gas window:

  • 50% Condensate
  • 30% Gas
  • 20% NGLs

20% of acreage is in the dry gas window, which is 100% dry gas. Pioneer is running 9 rigs and will be increasing to 19. Pioneer estimates a gross well cost between $7 and $8 million. IRR before tax is 110% in high condensate yield and 70% for low condensate yield at today's strip prices. Pioneer's Johnson GU#1 had a 48 hour IP rate of 7.6 MMcf/d and 252 Bo/d.

Carrizo Oil and Gas (NASDAQ:CRZO) has 33000 acres in the Eagle Ford's condensate window. Most is located in La Salle County. 80% is drillable at 115 acre spacing. It will accommodate 230 wells, and has an EUR of 400 MBoe. Carrizo's Eagle Ford acreage has target reserves of 92 MMBoe. Its 2011 capital program is $160 million of the total $302 million. Carrizo has complete five wells. The first three IP'd at over 1000 Bo/d while the other two IP'd at 815 Bo/d and 735 Bo/d. Well costs are approximately $7 to $7.5 million. Estimates have wells producing 70% liquids and 30% rich gas. F & D costs are $23.33/Boe and has an undiscounted payback of 1.8 years at $85 NYMEX.

EOG Resources (NYSE:EOG) is the biggest oil producer in the Eagle Ford. It has 590000 net acres. Of the three Eagle Ford windows, its acreage breaks down as follows:

  1. OIl Window-520000 Net Acres
  2. Gas Window-49000 Net Acres
  3. Wet Gas Window-26000 Net Acres

EOG estimates its potential reserves in the Eagle Ford at 900 MMBoe. This breaks down into:

  • 690 MMBo (Oil)
  • 100 MMBbl (NGL)
  • 661 Bcf (Gas)

Recent wells drilled by EOG in Gonzales County:

  • Edwards (2 Wells) Avg IP of 904 BO/d and 350 Mcfd
  • Sweet Unit (2 Wells) Avg IP of 1182 BO/d and 1323 Mcfd
  • HFS Unit(3 Wells) Avg IP of 1403 BO/d and 1047 Mcfd
  • Hill Unit #2H IP of 1233 BO/d and 685 Mcfd
  • Hansen-Kullin #3H IP of 1538 BO/d and 1519 Mcfd
  • Ullman #2H IP of 757 BO/d and 1007 Mcfd

Recent wells drilled by EOG in Karnes County:

  • Wagener Unit (4 Wells) Avg IP of 563 BO/d and 478 Mcfd
  • Dullnig #5H IP of 1353 BO/d and 1224 Mcfd
  • Braune Unit #3H IP of 601 BO/d and 458 Mcfd
  • Greenlow Unit (2 Wells) Avg IP 607 BO/d and 386 Mcfd
  • Beynon Unit (2 Wells) Avg IP 1424 BO/d and 1013 Mcfd
  • Wiatrek Unit (2 Wells) Avg IP 857 BO/d and 682 Mcfd
  • Vickers #2H IP 743 BO/d and 444 Mcfd

Recent wells drilled by EOG in Wilson County:

  • Borgfeld #3H IP of 830 BO/d and 411 Mcfd
  • Casares #1H IP of 786 BO/d and 382 Mcfd

Recent wells drilled by EOG in Atascosa County:

  • Joseph #3H IP of 1317 BO/d and 1200 Mcfd
  • Jendrusch Gerold Unit #1 H IP of 833 BO/d and 432 Mcfd

Recent wells drilled by EOG in LaSalle County:

  • Naylor Jones (2 Wells) Avg IP 873 BO/d and 1056 Mcfd
  • Hoff Unit (7 Wells) Avg IP 683 BO/d and 391 Mcfd

EOG drilled one well recently in McMullen County. The Haynes #4H had an IP of 604 BO/d and 179 Mcfd. All of the recent wells are in EOG's oil window acreage. EOG states the Eagle Ford wells will produce 40% of reserves in the first five years. EOG estimates eastern Eagle Ford wells will have an expected EUR of 460 MBoe, and estimates the Average IP between 800 and 1500 BO/d plus rich gas. Its western Eagle Ford acreage is expected to have and EUR of 430 MBoe, and estimates an average IP between 600 and 800 BO/d plus rich gas.

I will be covering more Eagle Ford names in upcoming articles. The purpose is to use company IP rates and expected EURs to identify "hot spots" in the Eagle Ford. One thing to consider will be the differentiation of company models for estimated ultimate recovery. A conservative company, like EOG, will give low projections. The thought process would be much like giving a low earnings forecast.

In summary, I think the Eagle Ford is a very good investment. Before investing in Marathon, I would look to other companies that have sizeable assets in the area, that made purchases much earlier. Many of the companies in the Eagle Ford are providing expected EURs. These EURs are difficult to model, as there is not enough information for reliable and repeatable numbers. The pull back in the market after disappointing first quarter numbers provides an opportunity in all the names listed.

>>Go to Part 2

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in LEI over the next 72 hours.

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