Better Know an Energy Play: Eagle Ford

To help Foolish investors better understand the oil and gas boom in the United States, we are putting together a series of articles focusing on the major energy plays in the lower 48. Today, we'll take a look at the Eagle Ford.

The Eagle Ford Shale swoops across southern Texas from the Mexico border up into East Texas. Its prime oil window is found in the northernmost strip of that band, followed next by a strip that produces mostly condensate, and finally a region that produces mostly dry gas.

Source: Energy Information Administration

The Eagle Ford offers two distinct advantages from a geological perspective. First is its distinct banding pattern. The prices of our commodities fluctuate from year to year, but the clear delineation in the Eagle Ford allows producers to easily pick up their rigs and move to the most lucrative window at any given time, provided they have acreage to move to.

Second, the pay zone in the Eagle Ford is thicker than the average shale play, with a higher than usual percentage of carbonate material.

Geology doesn't lie. According to the Texas Railroad Commission, last year the shale produced 914 million cubic feet of natural gas per day and 119,353 barrels of oil per day. So far this year, the gas number is down slightly to 880 mmcf per day, but the oil number has risen significantly to 297,079 bpd through August. That's an average number, though, and the commission reported that July's production was more than 310,000 barrels per day.

Energy consultancy Bentek Energy estimates that crude oil and condensate production taken together reached more than 700,000 barrels per day in September, and could reach as high as 1.6 million bpd by 2016. Those are impressive numbers, so let's take a look at who is making the most of that production.

Players
When PetroHawk -- since bought out by BHP Billiton (NYSE: BHP  )  -- drilled its first well in the Eagle Ford in 2008, oil production in the play was only 358 barrels per day. Things have obviously progressed quickly, and there are a lot more players cashing in on soaring production numbers.

The top landholders in the play other than BHP Billiton are EOG Resources (NYSE: EOG  ) , Chesapeake Energy (NYSE: CHK  ) , Marathon Oil (NYSE: MRO  ) , ConocoPhillips (NYSE: COP  ) , Murphy Oil (NYSE: MUR  ) , Anadarko Petroleum (NYSE: APC  ) , and Swift Energy (NYSE: SFY  ) . Two joint ventures, one between Pioneer Natural Resources (NYSE: PXD  ) and India's Reliance, and another between Talisman Energy (NYSE: TLM  ) and Norway's Statoil (NYSE: STO  ) are also among the acreage leaders.

Source: Company presentations

And here is how the production story has played out for the companies above through the third quarter.

Source: Company presentations

As the Eagle Ford is a relatively new play, it is not surprising to see large acreage positions closely tied to top production numbers. That may start to change over time as various factors begin to play themselves out, including production and drilling efficiencies and access to pipeline capacity.

Cost of doing business
There has been a drilling frenzy in the Eagle Ford since January, and almost all of the new well starts this year have been horizontal wells.

Source: Energy Information Administration

These wells are more expensive than vertical wells, and have a higher breakeven price than producers in vertical-friendly plays like the Permian Basin, but they are also typically shorter than horizontal wells in other plays, and therefore cost less. ConocoPhillips is estimated to lead the industry with a $37 per barrel breakeven cost. However, analysts at Tudor Pickering Holt estimate the average breakeven price ranges from $48 to $80 per barrel. And drillers are learning to be more efficient as time goes by. Bentek Energy reports that though rig counts have come down off their June high, production hasn't dropped because the time needed for well starts has decreased.

Aside from relatively low costs, the Eagle Ford has two huge advantages over the nation's other oil plays: well production rates and proximity to market.

Overall attractiveness
According to research by energy consultancy IHS, an Eagle Ford well in its peak month of production averages 300-600 bpd, compared to a Bakken well in its peak which averages 150-300 bpd. Though a well's production declines rapidly after reaching this peak, it will continue to produce low volumes for quite some time. As the play ages and more data become available, it will be easier to forecast future production in the shale.

On top of great well rates, producers love the Eagle Ford because it's located just 100 miles from the Gulf Coast refining hub. Initially, producers were forced to use expensive truck deliveries to cart oil out of the play and into hubs like Houston and Corpus Christi, but enough pipeline capacity has been added this year to reduce that costly burden. The following projects were completed this year to meet demand:

  • June: Enterprise Products Partners (NYSE: EPD  ) adds 350,000 bpd capacity with its Eagle Ford pipeline system.
  • June: Kinder Morgan (NYSE: KMI  ) completes a $215 million project that brings 300,000 bpd online.
  • August: Enterprise and Plains All American (NYSE: PAA  ) announce they are consolidating respective projects and bringing 350,000 bpd online by the first quarter of 2013. Plains will be the operator, and a portion of the capacity will be online by year's end.

Platts estimates that capacity from pipeline projects will outpace expected production for the next four years. That is very much not the case in the Bakken or Permian oil plays, or the Marcellus gas play for that matter. So while midstream investors should carefully monitor infrastructure build-out, E&P investors can breathe a sigh of relief for once.

All the upside to the Eagle Ford means that the acreage isn't cheap. Before 2010, $4,000 per acre was not unheard of. In 2011, Marathon bought the leases on 141,000 acres from Hillcorp Resources and the $21,000 price per acre set a record. Flash-forward to today and some deals are pricing acreage as high as $25,000. One thing to watch here, however, is that many of the mineral leases signed in the rush of 2009-2010 are expiring this year and next. If companies haven't started production on those leases, they could lose the right to drill, allowing the landholders to release to the competition.

Foolish takeaway
Energy consultancy Wood Mackenzie estimates there will be a $28 billion capital investment in the Eagle Ford in 2013. Given everything we know about U.S. energy production right now (oil is worth more than gas, horizontal drilling is expensive, we don't have enough pipeline capacity, etc), the Eagle Ford is increasingly looking like the best place for companies -- and investors -- to put their money.

The growing production of natural gas from hydraulic fracturing and horizontal drilling is flooding the North American market and resulting in record-low prices for natural gas. Enterprise Products Partners, with its superior integrated asset base, can profit from the massive bottlenecks in takeaway capacity by taking on large-scale projects. To find out if Enterprise Products Partners is a buy or a sell today, click here now to check out The Motley Fool's brand new premium research report on the company.


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