Marathon May Have Increased the Value of Eagle Ford Leaseholders Part 4

by: Michael Filloon

<< Return to Part 3

Marathon's move in the Eagle Ford to pay nearly $25,000 per acre substantiates the value of acres in this play. When current production is figured in, Marathon paid approximately $21000/acre. While some believe Marathon paid too much, I believe the purchase was at the high end of fair value. The Eagle Ford has high production areas or "sweet spots," that vary from county to county. To properly value acreage with in this play, one must know where these sweet spots are. The Maverick Basin has had some very good IP rates, and continues to be a productive area. The fourth part on this series covers names in the Eagle Ford and further delineates the IP rates and possible EURs in this play.

SM Energy (NYSE:SM) has 250,000 net acres in the Eagle Ford shale. At the end of 2010, 21% of its proved reserves were in the Eagle Ford. In the first quarter of this year, it derived 37% of its production from this play. At the end of 2010 it had total proved reserves of 207 Bcfe. In the first quarter of 2011, net production was 148 Mmcfe/d. SM operates 165,000 net acres in the Eagle Ford. It has three operated rigs running. SM will increase up to a total of 6 rigs. Seventy net wells will be drilled in the operated acreage. Well costs are between $6.5 to $7.5 million. Most of SM's operated acreage is located in the volatile oil window. This is mostly in Webb County, but also includes Dimmit and LaSalle. SM has completed several wells at Galvan Ranch.

Galvan Ranch 10H

  • 7-day Max Sales-8.0 Mmcfe/d
  • 30-day Max Sales-7.3 Mmcfe/d
  • 1250 Btu/SCF gas & 25 BPM Condensate Yield

Galvan Ranch 14H

  • 7-day Max Sales-7.0 Mmcfe/d
  • 30-day Max Sales-5.9 Mmcfe/d
  • 1250 Btu/SCF gas & 10 BPM Condensate Yield

Galvan Ranch 16H

  • 7-day Max Sales-8.4 Mmcfe/d
  • 30-day Max Sales-7.8 Mmcfe/d
  • 1250 Btu/SCF gas & 55 BPM Condensate Yield

SM has 85000 net acres in its non-operated Eagle Ford. It has a 25% working interest with Anadarko (NYSE:APC). SM estimates it will participate in 50 new wells this year. It plans to sell all or the majority of its non-operated acres. SM will use this capital to develop its operated acreage. 57% of its 2011 cap ex will be spent on the Eagle Ford. Anadarko has EUR expectations of 450+ Mboe on the wells partnered with SM Energy. SM Energy is one of my favorite names in the oil space. It is a good play on value.

Anadarko has 200,000 net acres in the Eagle Ford's Maverick Basin. As mentioned earlier, SM Energy has a 25% working interest with Anadarko. Anadarko is the number one producer in the Eagle Ford. Most of its acreage is in the gas/condensate window, with focus in Dimmit County. EUR expectations for Anadarko are 450+ Mboe. Production is:

  • 46% Oil
  • 27% NGLs
  • 27% Gas

It has over 2,000 possible well locations in the Eagle Ford. To properly value this acreage, one must look at the recent investment made by a subsidiary of the Korean National Oil Corporation. It will invest approximately $1.6 billion to develop the Eagle Ford over the next three years. This is the highest price paid (est. $16000/acre) in the Eagle Ford other than Marathon's deal with Hilcorp. Anadarko is a well run company with very good assets.

Forest Oil (NYSE:FST) has 109,000 net acres in the Eagle Ford. It has 1015 possible locations. Forest has two rigs in the Eagle Ford with a third on line sometime this year. The majority of acreage is in the oil window of Gonzales County. Forest has drilled in four different areas of Gonzales County:

  1. 7 wells drilled with an average IP of 1267 Bbls/d and 1188 Mcf/d
  2. 3 wells drilled with an average IP of 1311 Boe/d
  3. 2 wells drilled with an average IP of 904 Bbls/d and 350 Mcf/d
  4. 1 well drilled with an IP of 605 Boe/d

In Karnes County, 11 wells were drilled with an average IP of 716 Bbl/d and 561 Mcf/d. In Wilson County, 2 wells were drilled with and average IP of 808 Bbl/d and 397 Mcf/d. I like the location of this company's assets.

Swift Energy (SFY) has 79,000 net acres in the Eagle Ford.

  • 24000 Net Eagle Ford Oil Acres
  • 20000 Net Eagle Ford High GOR Oil Acres
  • 35000 Net Eagle Ford Dry Gas Acres

Swift has an approximate 1000 locations using 80 acre spacing. Estimated well costs are between $6.5 to $7.5 million. Swift's acres by county break down as follows:

  • 53,000 net acres in McMullen
  • 14,000 net acres in LaSalle
  • 8,000 net acres in Webb
  • 4,000 net acres in Zavala

The Eagle Ford has a significant difference in resource depending in which window a well is drilled. These differences translate to differing IP rates and EURs. Resource is broken down to:

The Eagle Ford Oil Window (77% Oil, 7% NGLs, and 16% Dry Gas):

  • has an estimated well cost of $7 to $9 million
  • has an EUR range of 252 to 354 Mboe/well
  • has an estimated IP rate of 1100 to 1572 Boe/d

The Eagle Ford High GOR Oil Window:

  • has an estimated well cost of $7 to $9 million
  • has an EUR range of 377 to 524 Mboe/well
  • has an estimated IP rate of 983 to 1405 Boe/d

The Eagle Ford Dry Gas Window (100% Dry Gas):

  • has an estimated well cost of $7 to $9 million
  • has an EUR range of 5 to 7 Bcf/well
  • has an estimated IP rate of 9.2 to 12.8 Mmcf

Long term Swift is a value, and has significant upside.

ConocoPhillips (NYSE:COP) has 220,000 net acres in the liquids rich fairway of the Eagle Ford. It has an average liquids yield of 75%. Conoco is currently running 13 rigs and will invest $1.4 billion in the Eagle Ford to increase production. Conoco states the average cash margin/Boe in the Eagle Ford is $45 versus an exploration and production average of $23 in other United State's unconventional plays. Five of Conoco's Eagle Ford wells are in production and showing good results (30-day average).

  1. Esse 1 produced 1169 Boe/d
  2. Joahannes Unit #1 produced 1086 Boe/d
  3. Schulte Prospect #1 produced 1521 Boe/d
  4. Kennedy #1 produced 1647 Boe/d
  5. Schendel A 189 produced 1001 Boe/d

These wells produced an average 30-day production rate of 1285 Boe/d. In 2010 Conoco drilled 45 wells. Net production in the Eagle Ford for Conoco will rise from 10000 Boe/d at the end of 2010 to up to 30,000 Boe/d at the end of 2011. Conoco believes its total Eagle Ford production could increase to a peak production of 70,000 Boe/d.

Plains Exploration and Production (NYSE:PXP) has 58400 net acres in the Eagle Ford. Its acreage is adjacent to EOG Resources (NYSE:EOG), ConocoPhillips and Murphy Oil (NYSE:MUR). Plains will have 4 to 6 rigs running in 2011. I do like this location as it is focused in Karnes County and the area has had good results. It has possible locations of 487. Average well cost is $7 million. Average gross resource potential per well is 483 Mboe. 23% of its current 2011 budget will be spent in the Eagle Ford.

Newfield (NYSE:NFX) has an approximate 335000 net acres in the Eagle Ford. These acres are in Dimmit, Maverick and Zavala counties. In February of 2010, Newfield acquired the assets for $209MM. Eleven wells were drilled in 2010. The oil gravity from this play ranges from 30 to 50 API. Its high btu gas ranges from 1200 to 1315 btu. Newfield's Eagle Ford assets are in the Maverick Basin. Newfield's acreage is in the vicinity of:

  • Shell (RDS-A)
  • Petrohawk (NYSE:HK)
  • Chesapeake (NYSE:CHK)
  • Anadarko

  • SM Energy

In 2010, Newfield expected EURs of 200 to 400 Mboe. Newfield's IP rates for 6 wells drilled in 2010 had an average of 630 Boe/d. These wells ranged from 400 Boe/d to 900 Boe/d. The 30-day IP rate for all six wells was 400 Boe/d. This year Newfield is estimating 20-25 wells will be drilled in the Eagle Ford. It estimated well costs to be $5.5 million/well. I like Newfield, and I think its US acreages are quite good. Solid investment going forward.

Oil and gas names have had a large pullback since reporting of first quarter results. Mark to market hedging losses decreased upside to some of the best companies in this space. I am using this pullback as an opportunity to buy into some of my favorite stocks. Companies like Brigham (BEXP) and Kodiak (NYSE:KOG) have experienced an over correction that allows those interested in the space to acquire names on the cheap.

Disclosure: I am long BEXP.

Additional disclosure: This is a list of names currently in oil and gas production in the Eagle Ford. It is only a list and is not a recommendation to buy. Commodities markets can have major swings to the downside with little warning and can create significant losses in a very short period of time. Always study the stocks you are interested in investing in. Feel free to let me know of any company names missed in this series, so I can add the names at later articles. Source: SM Energy Source: Anadarko Source: Forest Oil Source: Swift Energy Source: ConocoPhillips Source: Plains Exploration Source: EOG Resources Source: Murphy Source: Newfield.

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