- Looking at the geographical advantages the Eagle Ford has over the Permian Basin.
- How EOG Resources Inc. is capitalizing on those advantages.
- Overview of EOG Resources' Eagle Ford development strategy and sources of potential operational upside.
EOG Resources Inc. (NYSE:EOG) has one of the most enviable positions in the Eagle Ford, an oil-rich play spread across South Texas. While the Eagle Ford is not as “hot” as the Permian, Tier 1 EF opportunities have a geographical advantage over similar opportunities on the other side of the state, particularly in regards to oil & gas realizations. Let’s go over EOG Resources Inc.’s largest producing asset, what investors can expect going forward, and where the Eagle Ford outperforms the Permian Basin.
At the end of 2017, EOG Resources had interests in 582,000 net acres across the Eagle Ford play. 99% of that is held by production, meaning EOG doesn’t have to drill uneconomical wells to retain its leaseholds.
The vast majority of the company’s EF acreage (520,000 net acres) is situated in the oil window where the best well returns can be found. The counties with the most prolific wells are Karnes, Gonzales, DeWitt, and the northern parts of Live Oak. Wells in this region have a production mix weighted heavily towards crude and condensate. Below is a map of EOG Resources’ Eagle Ford acreage. As you can see, it has a lot of contiguous acreage in the Tier 1 part of the play.
Source: EOG Resources Inc. (With some additions from the author)
On average, EOG Resources pumped 171,000 bpd of oil/condensate, 31,000 bpds of NGLs, and 180 MMcf/d of natural gas out of the Eagle Ford/Austin Chalk play last year. That was equal to about half of its crude/condensate output in 2017.
The company brought 217 net wells targeting the Eagle Ford Shale formation and another 28 net wells targeting the Austin Chalk formation online last year. This year, EOG plans on bringing 260 net EF wells online on top of the 25 net AC wells. EOG is running nine drilling rigs and seven completion crews to make that guidance a reality. EOG is expecting that the average development cost for an Eagle Ford well will drop by $200,000 this year to $4.3 million, as its ability to self-source sand for its well completions keeps a lid on third-party pricing pressures. We'll see if that turns out to be true later on.
Within the Eagle Ford Shale formation, the Lower EF horizon has been the primary target for EOG and the industry at-large. The horizon offers up the most prolific and economical wells in the play, and those well results are easily repeatable. However, those locations won’t last forever. The Upper Eagle Ford horizon and the Austin Chalk formation are EOG’s two primary sources of unconventional exploration upside in the region.
EOG Resources added 500 net well locations in the Eagle Ford to its premium growth inventory last year, roughly double the amount of net wells it turned online in 2017. Management cited improving well productivity and lower well costs as a driving factor for those additions. Reading more into that, it appears EOG was able to push additional UEF and AC well locations into the Tier 1 category.
The Austin Chalk formation overlays large parts of the Eagle Ford Shale formation, but EOG has only just begun to delineate the core of the play (management hasn't provided a core Austin Chalk acreage figure yet, which will help determine well location sizes).
Last year, the average development cost of EOG’s AC wells was $4.3 million, with an average 30-day IP rate of 3,200 BOE/d. Those AC wells had lateral lengths between 4,000 feet and 6,000 feet, which are considered "standard" lateral lengths. During EOG’s Q4 2017 conference call, management noted:
“Last year, we identified a sweet spot in Karnes County through an integrated exploration effort. Precision targets within the Austin Chalk respond extremely well to EOG's high density completions. We continue to combine our geologic database created through our Eagle Ford development with recent core data from the Austin Chalk to delineate additional sweet spots across our Eagle Ford acreage. The Austin Chalk is geologically and stratigraphically complex, so our continued exploration effort will take time.”
Another way EOG is maximizing its Eagle Ford position is through gas reinjection enhanced oil recovery projects. By injecting gas into its legacy wells in the oil window, EOG has found it can earn an impressive return on its capital by boosting those wells' recovery rates. EOG plans to add 90 net wells to its Eagle Ford EOR program this year, bringing the total by to 178 net wells by the end of 2018.
Eagle Ford’s geographical advantage over the Permian
It is true that when holding oil & gas realizations constant, the best Permian acreage will outperform the best Eagle Ford acreage when it comes to expected well returns. However, in the real world, the geographical location of the play has a huge influence on well returns that goes well beyond the quality of the geology.
Surging crude oil production is stressing the Permian Basin’s takeaway capacity and that is being reflected in the region’s oil pricing benchmarks. The Midland-to-WTI differential has widened to $4.50 per barrel as of this writing, with the market anticipating that spread will reach $6/barrel by October 2018.
On the other hand, Eagle Ford oil production fetches a premium to WTI pricing. LLS, Louisiana Light Sweet, trades at a $2-3/barrel premium to WTI.
EOG Resources’ management team noted that 100% of the company's Eagle Ford oil production fetches LLS-based realizations, which materially enhances the play's economics. While 20% of the company's Delaware Basin oil production is able to fetch similar realizations, a large portion of its Permian output is at the mercy of in-basin pricing.
Oil and natural gas production out of the Eagle Ford peaked back in 2015, with the play’s crude and gas output still ~400,000 bpd and 500 MMcfd below their respective peaks. Ample spare capacity on existing midstream infrastructure can soak up rising Eagle Ford production and preserve the play’s realization advantages.
Let's pivot now to natural gas realization differences between the Eagle Ford and the Permian basin. Due to stressed pipeline takeaway options, Permian gas prices based on Waha Hub prices are now trading well below Henry Hub. Eagle Ford players are able to fetch realizations close to Henry Hub due to easy access to Katy Hub-based realizations (gas hub located 20 miles Southwest of Houston), among others.
When adjusting for the differences in realizations, EOG Resources Inc.'s Eagle Ford division is a lot more economically competitive with its Permian Basin division than many may think. By appraising and delineating other horizons in the region, namely the Upper Eagle Ford and the Austin Chalk, EOG Resources Inc. should be able to build off of its 2017 successes and further extend its growth runway in this prolific play. In particular, investors should pay attention to how well EOG Resources Inc.'s Austin Chalk wells in Karnes County perform, and if that becomes a core development opportunity in the years ahead. Thanks for reading.
This article was written by
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