Chesapeake Remains the King of Shale

outh Texas' Eagle Ford shale has rocketed into first place as the nation's hottest unconventional oil and gas play -- and the driest energy exploration site this side of Saudi Arabia.

Essentially all of Texas has been hit by the state's most severe drought since recordkeeping began back in 1895. That was six years before the famous Spindletop hit near Beaumont, sending up a gusher and cementing the state's role as the nation's energy leader. But now, in the Rio Grande Valley, the border city of Laredo has counted just two inches of rain since early October. And the Edwards Aquifer Authority, the supplier of water to San Antonio and surrounding areas, is requiring that usage be chopped by 30%.

Is it really June?
As a native Texan, I typically dreaded the onset of summers, which were always hot and generally dry, but never like this latest version. It appears that these near-desert conditions are becoming both more severe and increasingly frequent. In 2009, the state contended with a drought that the agricultural commissioner reduced to one word: devastating. Then in April, a Texas A&M atmospheric scientist observed that, "All Texas had been free of exceptional drought status since 2009." Terrific! The current parched period dates to last October, which makes for a whole year's respite.

The state's massive agricultural underpinnings have been decimated, as always occurs during the dry spells. But now, the explosion of unconventional oil and gas activity in the Eagle Ford has environmentalists, regulators, just plain folks, and more than a few politicians watching raptly. Meanwhile, those questing after Eagle Ford gas, oil, and liquids include Petrohawk (NYSE: HK  ) , which drilled the first successful well in the play; and Chesapeake (NYSE: CHK  ) , which, along with its partner, China's CNOOC, (NYSE: CEO  ) is the area's acreage leader.

Thirsty fracking
The effects of the lingering dry period could be exacerbated by the controversial hydraulic fracturing (fracking) process employed in unconventional production. The process involves blasting the shale with a mixture of water, sand, and chemicals to shatter it and release the entombed hydrocarbons. It's a thirsty process, requiring up to 13 million gallons of water for a single well in the Eagle Ford. That's hardly compatible with Mother Nature having turned off the spigots, and rationing having become the order of the day.

However, the companies are doing what little they can to cut water usage. ExxonMobil (NYSE: XOM  ) , for instance, reduces its fracking fluid needs through recycling. Until recently, you wouldn't have encountered the big company in the Eagle Ford, but its $35 billion purchase of unconventional gas leader XTO last year has put it in the thick of the nation's shale plays.

Anadarko (NYSE: APC  ) , which, in addition to the Eagle Ford, is involved in the Marcellus, Haynesville, and Niobrara shales, is replacing dirt roads with limestone. It can thereby avoid spraying the roads to keep the dust under control. At the same time, it's installing monitors to gain up-to-the-minute information on its water usage.

I think I felt a drop
Surely, one day, when they're least expected, rain clouds will roll across South Texas again, making the companies' jobs easier and reducing the concerns of environmentalists and public officials. The sooner they do, the better. But there's always the memory of the 1950s drought, which caused a mini-dust bowl and hung around for seven years.

Nevertheless, activity in the Eagle Ford continues to grow exponentially. It's expected to do so for some time, or at least until natural gas prices rise and lessen the relative attractiveness of the Texas play's oil and liquids. An unpublished report by the Texas Water Development Board, along with a research arm of the University of Texas, apparently will predict a 10-fold jump in the demand for fracking water in South Texas by 2020, followed by another doubling in the next 10 years.

In the meantime, given the increased attention that many companies are paying to higher-priced liquids, rather than gas, it appears that there are bargains to be had in some of the formerly sexy gas-only shales. For instance, the $1.7 billion that ExxonMobil paid for a pair of private Pennsylvania companies last week equates to $5,000 per acre for the acquired Marcellus holdings.

That compares to the $17,000 per acre that Chesapeake forked over for acreage in the Marcellus early last year, when the Pennsylvania-centered play was itself the belle of the ball. Just last December, Dallas-based Exco Resources (NYSE: XCO  ) wrote a check to acquire Marcellus rights at $9,000 an acre. Those figures compare to the $20,000 an acre that Marathon Oil (NYSE: MRO  ) recently paid for 141,000 Eagle Ford net acres.

Do the shale shuffle
I learned long ago not to take even tentative stabs at predicting Texas weather. So I can only conclude with unshakable assurance that the Texas drought will break when it breaks. However, I will happily wager that the various shale plays will continue to vie for most-sought-after status in something of an oil and gas "Queen for a Day" rotation. It all started with the Barnett shale in North Texas. Oklahoma City-based Chesapeake held its 2007 annual meeting in Dallas with an eye toward sharing its excitement about the Barnett.

But the crown soon moved to the Haynesville shale of East Texas and Louisiana, and on to the Marcellus. You've seen how quickly it then headed for the "oilier" Eagle Ford and Bakken plays. Having observed how the game is played, then, I'm determined to keep an especially close eye on Chesapeake, which has accumulated big positions in all the major plays -- save for the Bakken -- along with a cadre of deep-pocketed partners.

Given those strengths, and despite my desire to pull an unknown name out of a hat, I'm nevertheless suggesting that the clear leader in shale play development merits prominent positioning on your personal watchlist.

Motley Fool newsletter services have recommended buying shares of Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Fool contributor David Lee Smith doesn't have financial interests in any of the companies mentioned. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 16, 2011, at 3:27 PM, gcmagone wrote:

    According to EOG Resources, Inc. reports they have the largest acreage position in the Eagle Ford play, mostly in the valuable oily section. So, they are the "king of shale" in Texas.

  • Report this Comment On June 16, 2011, at 7:36 PM, BenEagle wrote:

    Cheaspeake came very late to the play. Couldn't get their Eagle Fore team assembled in time. They

    bought on the fringe of the play (shallow and under pressured area) The gut of the play for all practical purposes was taken. Karnes and Dewitt are the primo areas (higher EURs. with northern Live Oak and then McMullen/LaSalle. But, CHK sold it to to CNOCC and made off like a bandit, cash wise. But, production will be marginal.

  • Report this Comment On June 16, 2011, at 11:05 PM, jekoslosky wrote:

    CHK makes up about 6% of my portfolio, here: http://bit.ly/iUPcpf

    I'm torn on the company for a few reasons: Natural Gas fracking here in Pa. still worries me environmentally, and CEO McClendon makes an insane salary.

    But I do like its prospects. It seems like the company has positioned itself well.

  • Report this Comment On June 17, 2011, at 6:32 PM, cladd wrote:

    Jekoslosky (above) wrote about fracking concerns.

    Big energy is realizing that they have dealt with this issue really poorly and have to be more proactive and transparent. Read the comments from Exxon

    http://naturalgasforeurope.com/?p=9754

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