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There's More Underneath South Texas Than Just the Eagle Ford

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There's more underneath South Texas than just the Eagle Ford. Drillers in the region are exploring nearby formations and in some cases striking big finds. 

New plays developing
The Eagle Ford, a 50 mile wide shale window that swoops across southern Texas from the Mexican border, has sparked a renaissance of sorts in the state's oil industry. Five years ago, most investors had never heard of it. Today, the formation produces over 600,000 barrels per day and many analysts project that figure to surpass one million barrels by next year. 

But while the Eagle Ford still reigns supreme, other formations in the area are starting to produce oil and gas. In the past year, 600 drilling permits have been issued to explore rock layers directly above and below the Eagle Ford including the Olmos Sandstone, Austin Chalk, Buda Limestone, Edwards Limestone, and Pearsall Shale. It's only a sliver of the thousands of wells drilled in the Eagle Ford, but it could be the beginning of the next big oil grab in South Texas. 

Marathon Oil  (NYSE: MRO  ) , the third largest landowner in the Eagle Ford, has been one of the most aggressive in exploring these other formations. Earlier this year the company started drilling pilot wells in the Austin Chalk, which sits immediately above the Eagle Ford. Early results have been promising. Exploration wells have posted initial production rates around 980 barrels of oil equivalent per day with output similar to the Eagle Ford in terms of the mix of crude, liquids, and natural gas. While management is uncertain of the play's potential, they recognize that it could boost reserve figures for their Eagle Ford acreage. 

There's also a lot of excitement about the Pearsall shale, which lies underneath the Eagle Ford. Cabot Oil and Gas  (NYSE: COG  )  plans to drill 15 Pearsall wells this year. During the company's first quarter earnings call, Cabot reported that the first of these wells posted an initial 30- day production rate around 600 BOE/d which includes a roughly 50/50 split between oil and NGLs. 

"The Pearsall, it's still a young play and remains a science project for us," Cabot's Chief Executive Dan Dinges told analysts during the conference call. The company is evaluating the spacing of its wells and it expects to release more drilling results by year-end.

Several other companies are also looking at the Pearsall including Sanchez Energy  (NYSE: SN  ) , Magnum Hunter Resources, and Marathon Oil. Goodrich Petroleum has tentative plans to explore in the play later this year. 

But companies drilling in the Pearsall must really want to. To reach the formation operators must burrow 10,000 feet down directly through the lucrative Eagle Ford. And such activities aren't cheap. According to estimates provided by Cabot, each well costs $10 million to complete. 

Sanchez Energy admitted to The Houston Chronicle earlier this week that its attention remains largely on the Eagle Ford. With limited capital, there simply isn't enough money to fund both Eagle Ford drilling and Pearsall development. Ultimately, Sanchez and other companies will be putting most of their chips on the Eagle Ford where they can generate the highest returns. 

Foolish bottom line
Yet in spite of these hurdles, the exploration of these formations could be a hidden boost for operators in the Eagle Ford. As these assets are de-risked, companies could find that they're sitting on much larger reserves than originally anticipated. That would be a catalyst for higher share prices and is definitely a development investors should keep an eye on.

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5/27/2016 4:02 PM
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