The Eagle Ford is a booming shale play in South Texas, and is now the largest single oil and gas development in the world based on capital expenditures. Spanning some 20 counties from southern to central Texas, the Eagle Ford is believed to be the "source rock" for all the hydrocarbons above it, including oil.
This shale has attracted companies big and small. It was originally discovered by PetroHawk in 2010, but is now host to a number of operators. Like most other new oilfield projects, the Eagle Ford is becoming more economically viable as oil servicers flock in to bid down the costs of service and pipelines are opened to move gas and liquids from wellhead to terminal. After two to three years of hard work on the part of upstream and midstream companies alike, the Eagle Ford has fully come online and is now central to the American oil renaissance.
With a number of names operating in this shale, some of them well known by the public but most of them not, where does an interested investor start? Which companies have the best "core" acreage? Which ones are getting the highest returns and margins per barrel? Most of all, which companies are profiting the most in a sustainable way?
More technique than location
One interesting and very useful metric to consider is well cost. Just a few years ago shale drilling was prohibitively expensive, but improving technology and a build-out of efficient energy infrastructure have brought costs down to the point where horizontal drilling in many shales is now commercially viable. Still, this form of drilling is much more expensive than its conventional counterpart, and costs per well are a crucial factor for success. As it is, well costs in the Eagle Ford vary by operator.
Eagle Ford by cost per well
Before we look at the numbers, a few caveats. Not all companies disclose their cost per Eagle Ford well, nor is this list comprehensive. To keep this article meaningful, I hand picked four whose well costs I believe are the most telling. That being said, here is how four key operators stack up.
Let's go over these names, starting with the highest. Sanchez Energy, (NYSE: SN ) (NYSE: SN ) (NYSE: SN ) a young, small-cap operator in the eastern "core" as well as Maverick County (near Laredo), has the highest well costs at $9 million per well. This isn't a big surprise. Of all the four listed above, Sanchez is the youngest company and is also the most growth-oriented at this time: Sanchez will grow its production by triple digits this year. Expect it to lower its well costs over time.
Carrizo Oil & Gas (NASDAQ: CRZO ) (NASDAQ: CRZO ) (NASDAQ: CRZO ) is the next name on the list at an estimated $8 million per future well drilled. While it does have a higher cost than Rosetta Resources (UNKNOWN: ROSE.DL ) (UNKNOWN: ROSE.DL ) (UNKNOWN: ROSE.DL ) , don't get too down on the name. Consider that nearly all of Carrizo's volume is oil, where much of Rosetta's Eagle Ford volume is made up of the more abundant (but lower priced) natural gas. So while Carrizo's expenses are higher, it probably makes a higher margin per barrel equivalent than does Rosetta. Both names are a bit older than Sanchez.
As you might notice, a higher well cost can sometimes just be the indicator of a development's young age. Also, in today's pricing environment, it may be better to have an expensive oily well rather than a cheap gassy one. When looking at well cost numbers, it's important to consider the big picture before jumping to a conclusion.
But if there is one definitive takeaway here, let it be this: EOG Resources (NYSE: EOG ) (NYSE: EOG ) (NYSE: EOG ) is hands down the most efficient operator in the Eagle Ford. Consider that its well costs beat the closest competitor by $1.5 million, and yet its Eagle Ford production is almost all oil. That brings huge additional economic benefits, namely higher returns per well, which other operators cannot match.
In management's own words, EOG is indeed a "well-oiled machine." It is also the largest acreage holder in the Eagle Ford, and in the last two years, has committed itself to streamlining and improving its practices and technologies there. It shows in the well cost.
Cost per well is an important statistic, but it doesn't tell us everything. Think of this metric as an important tool in the energy investor's box. In this case, the lowest cost per well is clearly EOG, and a look at the "big picture" will confirm that it is indeed the biggest, most efficient and most profitable operator in this very important shale play.
That's not to say it is the only worthy investment in this shale: The other three are much smaller companies, which could possibly have more upside. However, anyone interested in investing in the Eagle Ford needs to consider costs per well and should therefore place EOG on the short list. It's a well-oiled machine.
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