Why the Eagle Ford Was the Hottest Shale Play of 2013

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Despite an overall decline in the total value of U.S. upstream deal-making activity last year, Texas' Eagle Ford shale remained in high demand, attracting more merger and acquisition investment than any other play in the country. Let's take a closer look at why the Eagle Ford is so highly sought after and some of the companies betting big on its continued success.

2013 upstream M&A activity
According to oil and gas research firm PLS, the Eagle Ford attracted $8.8 billion in upstream oil and gas deals in 2013, placing it at the top of the most active oil and gas plays in the country in terms of merger activity.

The second and third most active U.S. oil and gas plays last year were the Permian Basin of West Texas, where deals totaled $7.5 billion, and the Rocky Mountain region, which saw $5.5 billion in deals. Meanwhile, total upstream M&A activity last year plunged to $137.7 billion, down 49% from 2012 and the lowest level since 2008, according to PLS data.

Three of last year's five largest upstream oil and gas deals occurred in the U.S. These were Devon Energy's (NYSE: DVN  ) $6 billion acquisition of Eagle Ford assets from privately held GeoSouthern Energy in November -- the year's single largest transaction; Linn Energy's (NASDAQ: LINE  ) $4.9 billion purchase of Berry Petroleum in February; and Fieldwood Energy's $3.75 billion acquisition of Apache's (NYSE: APA  ) Gulf of Mexico assets in July.

Why the Eagle Ford is so popular
The Eagle Ford, a vast shale formation underlying much of southern Texas, is one of the two fastest-growing shale plays in the country, along with North Dakota's Bakken. According to an October report from the U.S. Energy Information Admiration, production from the play surpassed 1 million barrels per day in August and is poised to continue growing at a rapid clip.

Energy companies are attracted to the Eagle Ford mainly because of its massive resource base, its strong economics, and its highly attractive oil and gas mix. Many have already invested heavily in the play and continue to see strong returns and rapid growth in production. Chesapeake Energy (NYSE: CHK  ) , for instance, views the play as essential in meeting its oil production growth target.

The company's third-quarter Eagle Ford production surged 82% year over year and is expected to continue growing robustly, as Chesapeake ramps up its rig count in the region by 50% to 15 rigs this year. With roughly three-quarters of its Eagle Ford acreage now held by production and with approximately 3,400 remaining drilling locations, Chesapeake still has a huge runway for growth in the play.

ConocoPhillips (NYSE: COP  ) is similarly bullish about the Eagle Ford's potential and plans to spend $8 billion through 2017 on developing its 227,000 net acreage position in the play. The company's Eagle Ford production surged 66% year over year to 126 million barrels of oil equivalent per day in the most recent quarter and now accounts for roughly a quarter of its Lower 48 production. With a deep inventory of 1,800 remaining drilling locations, Conoco expects production from the play to grow at a compound annual rate of 16% through 2017.

Last but certainly not least is EOG Resources (NYSE: EOG  ) , the largest producer and leaseholder in the Eagle Ford, with 639,000 net acres under its belt. Thanks to greater use of multiwell pad drilling and improvements in completion techniques, its initial production rates in the Eagle Ford increased by more than 20% last year, while direct after-tax reinvestment rates of return are now in the low triple-digits. Having identified nearly 5,000 undrilled locations representing a 12-year inventory, EOG is likely to remain one of the play's largest and most profitable drillers for years to come.

What's next for the Eagle Ford?
Despite 2012's total decline in U.S. upstream M&A activity, merger deals in the Eagle Ford remained robust largely because of the play's attractive economics and high oil content. Investors can expect much of the same going forward, with experts estimating that oil and gas companies will spend between $23 and $30 billion in the play this year, compared to $28 billion in 2013.

With continued efficiency gains expected from increased multiwell pad drilling and other techniques, production and returns should continue to improve for well-positioned Eagle Ford drillers like EOG, ConocoPhillips, and Chesapeake.

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Arjun Sreekumar

Arjun is a value-oriented investor focusing primarily on the oil and gas sector, with an emphasis on E&Ps and integrated majors. He also occasionally writes about the US housing market and China’s economy.

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