I've been tuning into a lot of conference calls by the leading independent oil and gas producers this week, and they're saying some startling things. Rather than break out each company's results, I'm going to focus on a few key recurring themes.
Gas is trash
This one should be no surprise, but most E&Ps are avoiding natural gas plays like the plague. It's hard to blame them, with oil soaring and gas down in the sub-$4 dumps.
EOG Resources (NYSE: EOG ) disclosed that it will be drilling zero Barnett shale dry gas wells in 2011. Zero! And that's one of the better onshore natural gas plays in the country. The company is also drilling just the bare minimum of wells in the Marcellus, the Haynesville/Bossier, and the Horn River to hold onto its acreage in these other leading gas plays.
Anadarko Petroleum (NYSE: APC ) had no operated rigs in the once-hot Haynesville, having moved rigs to the oilier Eagle Ford and Bone Spring plays. The company is still giving the Marcellus plenty of love, but it also has Mitsui & Co. picking up part of the tab in a lucrative joint venture structure. Chesapeake Energy (NYSE: CHK ) has the same situation with partner Statoil. Having a partner carry a portion of your costs can do wonders for your drilling economics.
Even EnCana (NYSE: ECA ) , which had appeared truly gung-ho on pumping up its gas production as recently as this summer, is now dialing back. The company says it's still capable of doubling production per share in five years, but that it's slowing its growth rate in the face of low prices. Thank goodness.
The onshore oil bash
One thing making a gas drilling pullback more palatable for onshore players is the sudden proliferation of oily resource plays. The Bakken has been blooming for years now, but that's proven just the tip of the iceberg. With the help of long horizontal laterals and massive multistage hydraulic fractures, onshore oil plays are popping up everywhere. This gives the independents a lot of places to redeploy capital.
EOG was an early mover in the Eagle Ford play in South Texas, and has reiterated its estimate of 900 million barrels of oil equivalent (boe) of net resource potential. Not everyone's Eagle Ford leasehold is this oily, but EOG pegs crude's contribution to the mix at 77%. This is a tremendous oil discovery, akin to what folks like Anadarko seek in the deepwater Gulf of Mexico.
Apache (NYSE: APA ) unveiled a new play this week -- sort of. The Hogshooter (what a name!) is a segment of the greater Granite Wash play that's lit a fire under operators like dividend darling Linn Energy (Nasdaq: LINE ) . Apache's first two Hogshooter wells delivered initial production rates of more than 2,000 barrels of oil per day. Not oil equivalent, but oil. Nearly two months later, each well is still kicking out 700 barrels per day (plus a bunch of gas).
Another emerging play that we're watching with great anticipation is the Niobrara in Colorado and Wyoming. Operators are mostly mum on this one, but Anadarko is bringing in additional rigs here, and Noble Energy (NYSE: NBL ) will double its horizontal drilling activity next year. Chesapeake is shopping a 33% joint venture interest in its 800,000-acre Rockies position, where it sees unrisked potential of 4.6 billion barrels of oil.
Success breeds new challenges
This is all very exciting, both for operators and investors. This onshore oil opportunity is so exciting that the industry has drilled itself right into an equipment shortage. Frac equipment is hard to come by, and completion costs have soared some 40% to 50%. EOG says its Eagle Ford well completions cost $1 million more than previously estimated, and that if the company were to call up a firm like Halliburton today to bring in a frac crew, there would be no availability prior to January of next year.
Frac delays are a big reason EOG dropped its production guidance, not only for this year, but for 2011 and 2012 as well. In short, this supply tightness is not going to lift anytime soon. This slower pace of completions is something to keep in mind as you try to form projections for any E&P with a big liquids-directed drilling program in 2011.