Increased Efficiency Leads to Higher Returns

There are plenty of spaces to increase efficiency and productivity in shale plays, and several companies are leading the way.  

EOG Resources (NYSE: EOG  ) has a sizable stake in the Delaware Basin, Leonard, and Wolfcamp and sees a lot of growth potential. The company has 2,700 places to drill in the area with 1.3 billion barrels of oil equivalent of reserves. There is a big growth runway in this area, and that is why EOG recently revised its oil production growth from 28% to 35% for 2013.  

Down in Texas
One of the major shale plays is the Eagle Ford down in Texas. The average well completion cost dropped from $6 million to $5.5 million, and EOG has put the costs benefits to work by increasing the number of wells it plans to drill in the area from 425 to 440.

In July EOG stated that it had a record producing well in the Eagle Ford, one that pumped out 7,513 barrels of oil and 6.8 million cubic feet of natural gas in one day. This well was drilled on a 376 acre lease, which leaves more wells to be drilled. If you assume a 75% decline in production in the first year this well will have pumped out over 1 million barrels of oil. That is very impressive and indicates that EOG's drilling style is successful.

Another company investing in the Eagle Ford is Pioneer Natural Resources  (NYSE: PXD  ) , which has completed 68 wells in the first half of 2013 and expects to complete 72 wells in the second half. This will boost production even further and at a lower cost due to 80% of wells being drilled on pads versus 45% in 2012. Pad drilling reduces costs and enables E&P companies to spend more on drilling.

Pad drilling reduces costs by $600,000-$700,000 per well, and Pioneer plans to further reduce costs with white-sand proppants. Pioneer has replaced ceramic proppant with white-sand, which reduces well completion costs by another $1.1 million.

Pioneer's plan to reduce well costs and drill for more wells will increase both production and Pioneer's bottom line. The less it costs to complete a well, the more wells Pioneer will be able to drill and will result in higher levels of growth.

The Eagle Ford has plenty of opportunities for E&P players in the area, but there are other areas to find growth. EOG has a diverse profile of assets that also spans up to North Dakota.

Bakken in more growth
EOG has been able to increase the amount of recoverable oil in the Bakken due to down spacing. In the Parshall field down spacing has increased the amount of recoverable oil to 12% from 8%, which has helped boost EOG's reserves. 

Down spacing is when you drill wells closer together, enabling you to drill more wells in the same amount of space, which pushes up production and the amount of recoverable reserves. Of the 53 wells EOG is drilling in the Bakken in 2013, most of them will be down spaced. This is why management has raised the drilling inventory in the Bakken to 12 years from seven, which gives EOG plenty of opportunity to increase drilling in the area for 2014.

Another company that operates in the Bakken, Oasis Petroleum (NYSE: OAS  )  is also using increased efficiency to boost output and lower costs. Oasis has been able to lower well completion costs down to $8.2 million and plans to reduce that to under $8 million by the end of the year.

This is a major achievement, especially when well completion costs stood at $10.5 million in the beginning of 2012. Part of the reduction comes from pad drilling, which shaves 5%-10% off completion costs.

Another way Oasis reduces costs is through its subsidiary Oasis Well Services, which cuts $400,000 off each well. Keep in mind that isn't factored into the $8.2 million completion cost, so really well completion costs are already under $8 million.

Oasis is able to drill more wells with the same amount of money due to significant cost reductions, which is why production is up 48% year over year. In the second half of 2013 Oasis is going to spend the majority of its capital expenditure budget, which will push production up between 4.4% and 13.4% next quarter.

Final thoughts
EOG is using down spacing to boost the amount of recoverable oil and the number of wells that can be drilled on its acreage. This has enabled EOG to have thousands of possible locations to drill and is part of the reason why it raised its guidance. EOG is worth looking at because of its ability to maximize its current assets. 

Pioneer Natural Resources and Oasis are two top companies to look at. Both companies are reducing well completion costs significantly and ramping up production in the second half of the year. That makes them good growth plays in both the short and long term as the combination of higher margins and a larger output pushes up the bottom line.

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